Fed's Bullard: Low Inflation Alone Cannot Justify Zero Rates

Federal Reserve Bank of St. Louis President James Bullard said central bank policy makers are torn with faster-than-expected labor market improvements suggesting a need for early rate increases, while inflation has remained too low.

“The improvement in the real economy has not been accompanied with upward movements in inflation so far,” Bullard told a Chicago event. “The level of inflation is not so low that it can alone justify a policy rate of zero.”

Bullard is not a voting member of the policy-setting federal Open Market Committee this year.

Most of the U.S. expanded at a “modest” or “moderate” pace last month and in early January, the Fed said in a report on the regional economy this week. Policy makers meet Jan. 27-28 as they consider when to raise interest rates for the first time since 2006.

The Fed last month said it would be “patient” in raising rates from close to zero, with Chair Janet Yellen saying an increase was unlikely before late April.

“The generally good real GDP growth, coupled with the sharp and surprising improvement in labor markets, suggests somewhat earlier and faster policy rate increases than would otherwise be the case,” Bullard said to the CFA Society of Chicago.

“Instead, market expectations for the policy rate have moved in the opposite direction, raising questions about the nature of the Committee’s reaction function to incoming data.”

Even as the labor market has improved, inflation has remained below the Fed’s 2 percent target for 31 straight months. The Fed’s preferred gauge, the personal consumption expenditures price index, rose 1.2 percent in the year through November. The core figure, which strips out volatile food and energy costs, rose 1.4 percent.

“Growth has been about as expected, but labor markets have improved more rapidly than expected, while inflation has remained low,” Bullard said. “The nature of this surprise pulls the Committee in two different directions on monetary policy.”

Bullard, 53, has been seen as a bellwether because his views have sometimes foreshadowed policy changes. He published a paper in 2010 entitled “Seven Faces of the Peril,” which called on the central bank to avert deflation by purchasing Treasury notes. That was followed by a second round of bond buying.

Bullard joined the St. Louis Fed’s research department in 1990 and became president of the regional bank in 2008. His district includes all of Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.