FOMC needs to be careful, Bullard says

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The Federal Open Market Committee needs to be careful because the market expects low inflation and the yield curve remains quite flat, Federal Reserve Bank of St. Louis President James Bullard said late Thursday.

“Market-based signals such as low market-based inflation expectations and a threatening yield curve inversion suggest that the FOMC needs to tread carefully going forward,” Bullard said in a speech at St. Cloud State University, according to materials released by the Fed. “Through its normalization program, the FOMC has already been sufficiently pre-emptive over the last two years to contain upside inflation risk.”

The FOMC may be short of its 2% inflation target again this year, he said, which would be the eighth consecutive year personal consumption expenditures have been below 2% on an annual basis.

“Market-based measures of inflation expectations suggest that financial markets believe the FOMC will again miss its PCE inflation target to the low side in 2019 and, indeed, for the next five years,” he said.

The Phillips curve, which suggests how labor market movement will play on inflation, he said, has not been as accurate as in the past. “[T]hese correlations have broken down during the last two decades, so they no longer provide a reliable signal,” Bullard noted. “Policymakers have to look elsewhere to discern the most likely direction for inflation.”

The yield curve has flattened and is trending toward inflation, and he warned, “a meaningful and sustained yield curve inversion would send a bearish signal for the U.S. economy.”

Inversions have been a precursor to recession, and would suggest financial markets see inflation and economic growth below the FOMC’s forecast.

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Monetary policy James Bullard Federal Reserve Federal Reserve Bank of St. Louis FOMC