Fed's Bullard Contrasts FOMC's 'slow Normalization' Of Rates Vs. Market's 'no Normalization'

The strength of the U.S. labor market, inflation levels that are closer to the Federal Reserve's target of 2% and easing international pressures are three factors that support the Federal Open Market Committee's aim for a slow normalization of interest rates, St. Louis Fed President James Bullard said in prepared remarks delivered in Beijing Monday. "By nearly any metric, U.S. labor markets are at or beyond full employment," Bullard said. "This may put upward pressure on inflation going forward." After a period of low inflation in the U.S., the large movements in oil prices had had a big effect on headline inflation, he said. At the same time, negative global factors appeared to ease in the first half of 2016, supporting the FOMC view. In contrast, the market view that rates will remain at current low levels for some time is supported by two factors, said Bullard: slow real GDP growth and low inflation expectations. "The slower, below-trend pace of recent U.S. growth is inconsistent with a slowly rising path for the policy rate," he said. Summing up, Bullard said the FOMC median projection is for a gradual pace of rate increases in the next few years. The market-based outlook is "shallower," he said, expecting just a few rate increases in the period, or almost no normalization. "U.S. evidence from labor markets, actual inflation readings and global influences suggests the FOMC median projection may be more nearly correct," he said. Meanwhile, "U.S. evidence from recent readings on GDP growth and market-based inflation expectations suggests the market view of the path of the policy rate may be more nearly correct."