St. Louis Federal Reserve President James Bullard spoke with FOX Business Network’s (FBN) Peter Barnes about raising interest rates saying, “Next week might be a little early.  I think we will use that meeting to assess the data.” Bullard went on to say, “I’d see September having more than a 50 percent probability right now.” When asked whether he thinks the economy can handle a rate increase Bullard said, “the economy as a whole, you can complain about this or that being sluggish, but it’s not in emergency mode.”

James Bullard: There Is "A 50% Probability" That The Fed Will Raise Rates In September
Source: Bloomberg Video Screenshot

James Bullard on whether the Federal Reserve will raise interest rates next week:

“Next week might be a little early.  I think we will use that meeting to assess the data.  We have tried to be data dependent here.  But I’d see September having more than a 50 percent probability right now, I think, you know, if you look at Chair Yellen’s testimony in Washington last week, she talked a lot about how you should try to be gradual – you know, go earlier, but be gradual and I think that certainly is my view and maybe the committee will come around to that view and go that way.”

James Bullard on whether he feels the economy is strong enough to handle a rate increase:

“Oh, yes. I think the economy is much closer to normal today than it’s been in quite a while, certainly over the last five years.  The main problem is we are in emergency settings for monetary policy.  We’ve still got the huge balance sheet, we’ve still got zero interest rates. But you know, the economy as a whole, you can complain about this or that being sluggish, but it’s not in emergency mode.  We’ve got unemployment very close to the natural rate.  Inflation is a little low, but probably come back up to targets.  This is a situation where we have to start thinking ahead more about where we’re going to be two years from now.  You got to be thinking about, you know, what’s the interest rate trajectory as the economy continues to improve? Unemployment will probably come down below 5 percent, we’ve got a lot of reaching for yield in the economy.  So I think it would be prudent to move off zero and then take it meeting by meeting from there.”

James Bullard on projecting below 5 percent unemployment by year-end:

“Unemployment will continue to fall through this year and we will get below 5 percent by the end of the year.”

James Bullard on his economic forecast for the remainder of 2015:

“I still think we’ll get reasonably good growth in the second half of the year, 3 percent, and that will offset what we saw in the first quarter. So we did have a weak first quarter, it was moderately concerning, but tracking estimates seem to indicate that the second quarter has bounced back and the outlook still looks good for the rest of the year. Some of the consumption numbers were a little bit weaker, but not weak enough to knock me off my baseline forecast.”

James Bullard on whether he wants to stay ahead of the curve:

“Absolutely.  If you get behind the curve in central bank, it’s not pretty.”

James Bullard on whether they will raise interest rates once or twice this year:

“Yeah, you don’t have to commit at this point because we are trying to be data dependent.  We will see how the data comes in during the fall.  We want to continue to think we’ll get three percent growth in the second half of the year and if that is the way it materializes, we continue to get good jobs reports, you know, you probably would see a couple of increases.”

James Bullard on Federal Reserve Chairman Janet Yellen mentioning she is not concerned about the international slowdown:

“Yeah, I don’t think they’re going to – You know, of course there are risks that are out there but I don’t think they’re going to manifest themselves in actually coming back to bite the U.S. economy during the second half of the year or beyond that. For Greece, I think – I mean, we’ve got a deal, looks like it’s going to go through.  You never know, it always takes – you know, there are always twists and turns.  But it does look like it’s going to go through.  So I think, at least for now, that is going to be behind us.  For China, China has certainly been slowing over the last couple of years, but I wouldn’t see the gyrations in the Shanghai stock market as being something that is large enough magnitude to really impact U.S. policy.”

?James Bullard on assets:

“We are seeing a lot of talk about reaching for yield.  I hear a lot of anecdotal reports from around the District and around the nation about investments that seem, you know, dotcom-ish, and so I am worried about that.  I don’t really think we are there today, but I think the risk would be over the next couple of years if we keep interest rates too low, then you might inflate this third major macroeconomic bubble in the U.S. economy and the last two bubbles, you know, when they collapsed, they caused recessions and the second one was a global disaster. So we really would like to not be in a situation where we have got this major bubble developing and brewing over the next couple years.  If we can smooth that out a little bit, then we’ll get a longer expansion and we’ll get better results for the U.S. economy.”

James Bullard on the audit the Fed bill and other legislation on Capitol Hill:

“Well, of course, it is up to Congress to decide what they want to do with the Fed.  This is an institution that has been around for 100 years. It has worked fairly well, so I think any changes would probably be minor or need to be minor because you do have a system that has worked fairly well.  It’s a complicated system, but it’s a good one because it has some power in Washington, but some power spread across the country, such as here at the St. Louis Fed in the eighth district. I am concerned about one provision that’s in the Shelbyville, which would make the New York Fed president appointed by the President of the United States and confirmed by the Senate.  I think that would politicize the Fed much more than it already is and I think the appointment process, as you know, is not working well.  A lot of hold ups and you end up putting a lot of open positions and I don’t think you want to do that with the New York Fed job. So I think you probably want to leave that one alone.  You already have appointed governors and they have oversight responsibility for the New York Fed.  So if you think that they are not doing what they’re supposed to do, then talk to them.  But I think putting another presidential appointment in there would be pretty bad.”

James Bullard on lags in monetary policy:

“There are lags in monetary policy so you have to be thinking over the next two years. If you just look at it today, and an unemployment rate of 5.3 percent, that is very close to a lot of estimates of a natural rate of unemployment. But what’s going to happen is that’s going to fall over the next two years and do you want interest rates to still be at zero when that is occurring. I think that’s the problem that we have to think about. That’s why it’s prudent I think to get off zero and shade our bets and move interest rates up as that improvement continues. Of course, everything is data dependent, so if some big shock got hit, then all bets are off. But if you just think about the likely trajectory, I think that’s the most likely path.”