St. Louis Federal Reserve President James Bullard spoke with Bloomberg’s Brendan Greeley, Michael McKee and Tom Keene from the Jackson Hole economic symposium. He spoke about the outlook for monetary policy, the U.S. economy and recent market volatility.

Bullard said that while world financial markets are volatile, U.S. fundamentals are good: “I’m not denying it’s a volatile period. But let me say this. U.S. fundamentals look good….The key question for the committee, and no decisions have been made here, but the key question for the committee is would you want to change the outlook based on the volatility that we’ve seen over the last 10 days? And I think the answer is going to be not very much.”

When asked whether he is worried about low Chinese Growth exporting deflation to the U.S., Bullard said: “Yes. The story that China growth might be slower than the reported numbers has been around for a long time. I am certainly hearing from CEOs who do business in China that it looks lower than the official numbers. But still that — I think that has been priced in the markets for a long time, and so it’s not that big a surprise, I don’t think.”

On whether a move in September gives confidence to the markets, Bullard said: “I think it will be a good day when we make this first move. We’ve been at zero for six and half years, and I think it will signal confidence in the U.S. market.”

James Bullard

Highlights:

  • Bullard says expects inflation effect from china not that big
  • says slow China growth ‘no big surprise’
  • says U.S. Fundamentals look good
  • last 10 days shouldn’t change FOMC outlook much
  • says it will be ‘good day’ when fed lifts rates
  • says fed should be very gradual, data dependent
  • Says lower oil prices generally good for U.S. Economy
  • Bullard: I actually think we’re O.K. On inflation front
  • Says jobless rate is down near natural rate
  • Wages are lagging indicator, don’t predict inflation
  • Measurement a ‘huge issue’ for productivity data
  • H1 U.S. Growth now looks ‘pretty good’
  • Looks like 2nd half will be better than 1h for U.S.
  • Bullard: lower inflation expecations give me pause
  • Tips declines are bit concerning
  • Tools for raising fed rates should be effective

James Bullard: Full Interview

James Bullard: Fed Rate Raising Tools Should Be Effective

BRENDAN GREELEY: There is a lot to start with, but let’s go first to China which seems to have been causing a lot of the market volatility that we’ve seen earlier this year. Mr. President, you said that you were sanguine about risks from China.

JAMES BULLARD: I said I was more sanguine than the markets. So I thought that was kind of a low bar.

GREELEY: Well let’s look at what we’ve seen over the course of the summer. Are you worried about low Chinese growth exporting deflation to the U.S.?

JAMES BULLARD: Yes. The story that China growth might be slower than the reported numbers has been around for a long time. I am certainly hearing from CEOs who do business in China that it looks lower than the official numbers. But still that — I think that has been priced in the markets for a long time, and so it’s not that big a surprise, I don’t think.

GREELEY: Well that’s priced into markets, but what about inflation here in the U.S.? Are we going to see lower inflation because of prices lower in China?

JAMES BULLARD: I don’t — that effect is not that big because we just don’t have — our economy is big. We’ve got a lot of other things going on other than trade to China. So I think there will be a little effect there, but it’s not that big. And let me just say on the Shanghai Composite, the Shanghai Composite in the first part of 2014 for six months just round numbers, trading at about 2,000. By June 2015 it’s trading at 5,000.

And now it’s trading at 3,000. So the thing went way, way up, probably beyond anything that anybody could rationalize. And now it has crashed down, and it’s still up a lot year-over-year. So I am not quite sure that we should be putting quite as much weight on the Shanghai Composite as we have been.

MICHAEL MCKEE: And you have made it quite clear you’re in favor of raising rates now. And then we have the market volatility, which Fed officials tell us they’d like to look through. But in 2013, the taper tantrum, the Fed held off on moving because they said financial conditions had tightened. Well your own St. Louis Fed financial stress index, out yesterday, hit a three-year high.

JAMES BULLARD: Yes.

MCKEE: Does that give you pause about a move in the near future?

JAMES BULLARD: Financial stress index is up, the — of course the VIX is up. This — I’m not denying it’s a volatile period. It is a volatile period. But let me say this. U.S. fundamentals look good. Labor markets look good. We got strong reports on the economy, second-quarter GDP revised up to 3.7. I think we’ve got a good second half of the year coming. So I think the U.S. outlook still looks very good, and the key question for the committee, and no decisions have been made here, but the key question for the committee is how much of — would you want to change the outlook based on the volatility that we’ve seen over the last 10 days?

And I think the answer is going to be not very much because we’ve certainly got lower interest rates in the U.S., longer-term interest rates than we would have otherwise had. We’ve got lower oil prices. So those are usually bullish factors. On the downside, you might have higher credit spreads, higher volatility, maybe a stronger dollar. Those probably roughly wash out. And so you have really got the same trajectory that the committee is going to be looking at that we were looking at before. So why would we change strategy, which was basically liftoff at some point based on this volatility?

MCKEE: Would you argue that if you do move in September it gives confidence to the markets?

JAMES BULLARD: Well I think it will be a good day when we make this first move. We’ve been at zero for six and half years, and I think it will signal confidence in the U.S. market. Also let me just remind everybody we’re talking about a miniscule move off of zero, and the committee has a strategy of let’s get going on this process, but let’s be very gradual. And Chair Yellen has been really hammering this point, let’s be very gradual and data dependent, and we’ll work our way up slowly, depending on how the economy performs going forward.

GREELEY: What is your alarm bell level of core PCE, to borrow the Bunker Hill metaphor? What are the whites of their eyes?

JAMES BULLARD: Core PCE inflation?

GREELEY: Yes.

JAMES BULLARD: Well inflation has been heavily affected by oil prices here, and oil price is another leg down. That’s — generally speaking that’s very good for the U.S. economy. We’re a big oil consumer. But it does affect our inflation numbers, and somehow you

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