The Fed: Fed’s Bullard says sharper-than-expected economic slowdown is ‘key risk’
The “key risk” facing the U.S. economy is a sharper-than-expected slowdown, despite the Federal Reserve’s recent interest-rate easing, said St. Louis Fed President James Bullard Thursday.
“It remains possible that a sharper-than-expected slowdown could materialize in the quarters ahead,” Bullard said, in a speech to the Rotary Club of Louisville.
Bullard said the U.S. economy has already been slowing down this year after relatively rapid growth over 2017 and 2018.
Downside risk may cause the slowdown to intensify, he said.
‘The Fed has made a major move during 2019 and now it makes sense to wait and see how the economy responds, during the fourth quarter here and into 2020.’
Bullard has been one of the most dovish regional Fed presidents, urging the Fed to start easing aggressively.
The Fed has tried to help insure against this downside risk by dramatically altering the path of interest rates this year, he said. The three rate cuts from July-October may help to foster somewhat faster growth next year, he said.
In comments to reporters, Bullard said the Fed should pause now.
“The Fed has made a major move during 2019 and now it makes sense to wait and see how the economy responds, during the fourth quarter here and into 2020,” Bullard said.
Even if some data soon surprised to the downside, the Fed has been pre-emptive, he said.
Earlier Thursday, Fed Chairman Jerome Powell told a congressional committee he didn’t see signs of a recession.
“The U.S. economy is in a very strong position. I think the outlook is a very positive one,” Powell told the House Budget Committee.
Bullard repeated that he thinks trade uncertainty could last “for years.” This creates a disincentive for global investment and, accordingly, the global growth environment looks weaker in recent quarters.
This slower growth may feed back into slower growth in the U.S., he said.
The St. Louis Fed president said that key measures of the U.S. Treasury yield curve have now returned to a positive slope.
“This return to a more normal state of affairs may be a bullish factor for 2020,” he said.
Bullard said his baseline forecast is 2% real GDP growth “or better” next year.
Right now, corporations are trying to reorganize global supply chains in light of trade uncertainty. When that is finished, global growth should pick up, he said.
“If we get through that whole process without having a major disruption to U.S. growth, I will call that a success,” he said.
Jim Caron, head of global macro strategies at Morgan Stanley, said he thinks the Fed will be on hold for 2020.
“There is a high bar for the Fed to cut rates further but perhaps an even higher bar for the Fed to hike rates,” Caron said in a note to clients.