A U.S. interest rate cut “may be warranted soon” given the rising risk to economic growth posed by global trade tensions as well as weak U.S. inflation, St. Louis Federal Reserve president James Bullard said Monday, the first Fed official to say recent events may require a central bank response.
Bullard said the Fed cannot react to every shift in the rapidly evolving trade feud between the U.S. and other top trading nations. However, he said, developments like the unexpected announcement of new tariffs on Mexican imports have created “an environment of elevated uncertainty...that could feed back to U.S. macroeconomic performance” as the global economy slows.
Bullard has long been concerned that bond pricing and weak inflation sent worrisome signals, but not enough to yet warrant reducing rates. The trade issue had been seen as a temporary threat, but likely to be resolved.
In comments to the Union League Club of Chicago, though, he said he returned from a recent trip to Hong Kong “a little more pessimistic” that the U.S. and China could reach a trade deal anytime soon, or that a new, predictable set of world trading rules will quickly emerge from the current disputes.
“The narrative on global trade has darkened,” Bullard said, taking stock of recent moves by the Trump administration to boost tariffs on Chinese imports as well as a threat to do so on goods from Mexico.
“The previous narrative was that deals were just around the corner and that trade issues would be resolved over the medium term. Not it looks like trade deals are not around the corner. There will be uncertainty that will extend out.”
The Fed “faces an economy that is expected to grow more slowly going forward, with some risk that the slowdown could be sharper than expected due to ongoing global trade regime uncertainty,” he said. “A downward policy rate adjustment may be warranted soon.”
He would not commit to voting for a rate cut when the Fed meets next in two weeks.
Whether the issues was trade risks or weak inflation, Bullard’s colleagues have been reluctant to endorse a rate cut yet, saying the Fed should not move from the current range of between 2.25 and 2.5 percent until some economic shock changes the outlook.
For Bullard, a voting member of the central bank’s rate-setting committee this year, that moment seems to have arrived. Along with trade, he has been concerned about the fact that rates on 10-year bonds have fallen below 3-month yields as well as below the federal funds rates itself. That “inversion” of the yield curve shows investors are concerned about the economic outlook, and has become deep and enduring enough to bolster the case for a rate cut.
“A downward adjustment of the policy rate may help re-center inflation and inflation expectations at the 2 percent target,” as well as provide “insurance” against a sharper than expected economic slowdown, Bullard said, comparable to rate cuts the Fed made in the mid-1990s to nudge along that expansion.