Federal Reserve Bank of St. Louis President James Bullard said investors should prepare for uncertainty on whether the Federal Open Market Committee will raise its target interest rate at each meeting next year, as the era of signaling moves is over.
“We are going to return to an era where there is a bit more uncertainty about what the committee is going to do, meeting to meeting,” Bullard, who votes next year on policy, told reporters after a speech in Fort Smith, Arkansas. “Markets have been used to us being at zero for seven years where we didn’t have this kind of uncertainty. I would welcome the return of that.”
Bullard said the best guide to the FOMC’s pace of tightening will be the quarterly forecasts submitted by participants. Policy makers believed that higher interest rates might be justified by December, though the pace of tightening will be gradual, according to minutes of the Oct. 27-28 meeting, released Wednesday in Washington, D.C.
Asked what gradual meant for 2016 and whether it would preclude, for example, an increase at the next meeting after liftoff, Bullard said, “I do think this will be debated a lot once the committee makes a decision on liftoff and this will be an important part of the policy debate in coming quarters.”
The St. Louis Fed chief said while the committee has said policy will be data dependent, he wants the group to follow through on that.
“When we had a normalization in 2004 to 2006 we moved at the same 25 basis points per meeting for 17 meetings in a row,” Bullard said. “I am virtually certain that was not optimal monetary policy. That was a very mechanical approach to increasing rates. This time I am hopeful we can be more flexible and reactive to data.”
“If the economy looked like it was slower, then maybe the committee would change plans a little bit,” Bullard said. “If the economy looked like it was stronger, then maybe the committee would go in a more hawkish direction.”
Bullard said he disagreed with a Fed staff presentation at last month’s FOMC meeting that put the neutral real interest rate close to zero. Other ways of calculating the level suggest it’s 1 percent to 2 percent, he said.
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.