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The Federal Reserve has enough evidence to lower interest rates right now, a former Fed official said Friday.
With interest rates high enough to dampen demand, inflation is on track to retreat to the Fed’s 2% target by the third quarter, former St. Louis Fed President James Bullard said, in a speech to the National Association of Business Economics policy conference in Washington.
At the same time, GDP growth appears on track to settle down at a 2% annual rate.
Two percent economic growth and 2% inflation “is a soft landing in my book,” Bullard said, adding he thinks this will be be the “steady state” for the U.S. going forward.
Ideally, when the economy hits the “steady state,” the Fed’s benchmark interest rate should be at “neutral,” neither boosting or dampening demand. Fed officials generally define neutral as a benchmark rate below 4%.
This suggests there should be more urgency for interest rate cuts, said Bullard, now dean of the Mitchell E. Daniels Jr. Business School at Purdue University.
Powell has said he doesn’t want to wait until inflation is actually at the 2% rate. “That would be the ‘Honey I forgot to shrink the policy rate’,” Bullard said.
The Fed’s benchmark rate is now in a range of 5.25%-5.5% The neutral rate is below 4%. There are only three Fed policy meetings before the third quarter of the year.
“The math is not adding up that the [interest rate] is going to be at the right level,” he said.
The Fed doesn’t want to get to the steady state with interest rates too high. If they did, the Fed would face the choice of cutting too rapidly or pushing inflation below the 2% target.
Bullard said Powell should communicate that this is not easy monetary policy but still restrictive monetary policy, but not as severe as it needed to be when inflation was running at a 5% rate.
The Fed would only have to make one quarter percentage-point move and not promise an entire sequence of cuts.
Powell could say “we’ve got enough data to lower a little bit,” Bullard said.
The 10-year Treasury note yield
BX:TMUBMUSD10Y
finished the week at 4.28%, up from 4.16% on Monday, on this week’s hotter-than-expected inflation data.
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