Bullard says low inflation not enough to justify zero rates

Federal Reserve Bank of St. Louis President James Bullard said low inflation is not enough to justify keeping rates near zero.

“The FOMC has indicated that the policy rate is likely to rise next year, with the exact timing dependent on macroeconomic data in coming quarters,” Bullard said in St. Louis, referring to the Federal Open Market Committee. “While a low inflation rate may suggest a somewhat lower-than-normal policy rate, that effect is not large enough to justify remaining at the zero lower bound.”

Bullard’s views last year swayed investors, with his speeches and interviews influencing the yield on the 10-year Treasury note more than any other Fed official, including then-Chairman Ben S. Bernanke, according to an analysis by Macroeconomic Advisers LLC, an economic consultancy firm.

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.

The FOMC on Oct. 29 kept a pledge to keep interest rates low for a “considerable time” after asset purchases end, while also adding that they will rise sooner if the economy does better and stay low if it doesn’t. Most policy makers, who ended their two-year asset program last month, expect the first rate rise since 2006 to come next year.

“Global factors, including low inflation in Europe and lower oil prices, may be temporarily holding inflation down in the U.S.,” he said.

Bullard said market-based measures of inflation expectations have declined to low levels in recent months but have rebounded since mid-October. In addition, policy guidelines such as the Taylor Rule don’t call for zero rates even with low inflation, he said.

“The Committee has not moved off of the zero interest rate policy so far, and in this sense the Committee is already exhibiting considerable patience,” Bullard said.

The St. Louis Fed president said employment has improved faster than expected.

“Labor markets have shown steady improvement this year,” he said. “Lower longer-term interest rates and lower oil prices in recent months should provide additional tailwinds for U.S. macroeconomic performance.”