NEW YORK – The Federal Reserve is likely to tighten monetary policy by yearend, first by letting a runoff of its balance sheet occur, but it’s “reasonable to expect a fed funds rate increase” in that frame too, according to Federal Reserve Bank of St. Louis President James Bullard.
Cautioning that the Fed needs to see more data before planning its next move, Bullard said growth in the first quarter was “a bit softer than expected” and joblessness remains high, so there’s no hurry to tighten policy.
“The Fed is in a good position to go on ‘pause,’ and collect more data about the economy” and see how conditions are before going forward, he said in an interview Wednesday morning on Bloomberg TV. He defined “pause” as the “fed funds rate stays where it is, the balance sheet stays where it is, policy rate stays where it is and language stays where it is.”
Exiting the accommodative policy, he said, will be “complicated” since there are “a lot of moving pieces” and there could be several correct ways to exit. He said he believes the Fed will use a “balance-sheet first” exit.
On inflation, Bullard said it “concerns” him, but expected inflation, as measured by the TIPs market “has drifted back down.” He added, “If the economy improves in the second half of the year, then we have to keep an eye on that and watch it closely, and expected inflation would bounce back up.”
For the rest of the year, Bullard said, he expects growth in the 3% to 4% range and he is “optimistic hiring will continue.”
