James Bullard, the president and chief executive officer of the Federal Reserve Bank of St. Louis, warned that the United States risks inflating asset prices bubbles if it the interest rates remain at zero. According to him, keeping the interest rates at zero will lead to “devastating consequences.”
In an interview with Financial Times, Bullard emphasized that the Federal Reserve “should get on with normalization” as soon as possible to prevent more aggressive interest rate hikes later, which could cause significant market volatility.
Bullard’s statement highlights the concerns of many central bankers regarding the low interest rates despite the improvement of the labor market in the United States.
Jim O’Shaughnessy: Fear Signals Created By The Reptilian Brain
ValueWalk's Raul Panganiban interviews Jim O’Shaughnessy, Chairman, Co-chief Investment Officer, and Portfolio Manager at O’Shaughnessy Asset Management. In this part, Jim discusses the fear and emotional signals created by the reptilian brain. Q1 2020 hedge fund letters, conferences and more That's very cool. For the factor to try to seek the reason why it works, Read More
The U.S. unemployment rate declined to 5.5% last February, the lowest since 2008. Bullard noted that the unemployment rate in the country is expected to drop below 5% in the third quarter of this year.
Bullard says zero interest rates lead to asset price bubble
During the interview, Bullard recalled the tech bubble in 1990s and the housing bubble in the 2000s. According to him, “Zero [interest rates] is too low in that kind of environment. I wouldn’t be comfortable with that. A zero rate would feed into an asset price bubble”.
“When asset bubbles start, they keep going until they blow up out of control with devastating consequences,” added Bullard.
Current low inflation caused by cheap oil prices
Bullard believed that the recently reported weaker U.S. economic data are temporary, and the current low inflation was caused by cheap oil prices. According to him, the inflation will increase once the oil market became stable.
He added that cheaper oil prices will boost fuel consumption over the coming months once consumers understand that they can depend on the persistent improvement in their real incomes.
Bullard said: “Low inflation doesn’t rationalize policy rates of zero; it rationalizes a policy rate below normal, but not zero.”
The Federal Reserve recently removed the term “patient: in describing its position in raising the interest rates. Federal Reserve Chairwoman Janet Yellen stated that the central bank will likely remain “highly accommodative.” Policy makers are expected to increase interest rates at in June or September.
“US monetary policy is designed for the domestic economy, but we do look at all aspects of US growth and inflation, which includes emerging markets?.?.?.?I can’t believe [a rate rise] would be a shock for emerging markets,” said Bullard.