Inflation expectations too low for comfort, Fed´s Bullard says

The US Federal Reserve shared part of the blame for the 'sell-off' seen in financial markets, albeit not the current crop of rate-setters, and it would be "unwise" to raise rates again now, a top official said on Thursday.

In remarks to broadcaster CNBC, the president of the Federal Reserve bank of St.Louis, James Bullard, referenced how the central bank had "mechanistically" raised its main policy rates during the previous tightening cycle.

The country´s monetary authority had raised its main policy rate 17 consecutive times between 2004 to 2006.

That led investors to believe that a repeat was on the cards, with the Fed moving like a "freight train" no matter what.

It was as if the December hike had been 125 basis points, by pricing in a first rate move followed by four more in 2016 all at once.

Current Fed chief Janet Yellen had attempted to stress that further rate hikes in 2016 would depend on good economic news but markets did not believe her, Bullard said.

Fed left facing a conundrum

Another interest rate increase would be "unwise" at the moment, he added, because investors did not believe inflation would rise over the next five years.

Bullard was careful to distinguish between inflation expectations and current rates of headline inflation, of which the latter was being depressed by 'transitory' factors according to rate-setters at the Fed.

That did not mean the economy was in the tank and 'actual' inflation was in fact climbing, Bullard pointed out, but according to the Fed´s models inflation expectations were a bigger driver of where inflation was headed.

Inflation expectations had fallen since November despite the stabilisation seen in oil prices, he emphasised.

"Starting in November, we had another leg down in the oil markets. This is too low for comfort, and it's giving me pause," he said.

Global recession not be a concern

He was not concerned about the risk of a global recession in 2016 either.

"The G-7 economies are not growing very fast. And China is slowing down, so you just don't have as much global growth as you once had," the Fed official said.

Bullard also believed the Fed´s recent decision to hike rates had averted an asset bubble.

"If we had continued to go up at that same pace, that would have been an asset pricing bubble. You're [now] closer to fair value."