HONG KONG (Reuters) – Further weakness in inflation could prompt the US Federal Reserve to cut interest rates, even if economic growth keeps its momentum, James Bullard, President of the Federal Reserve Bank of St. Louis, said on Wednesday.
James Bullard, President of the Federal Reserve Bank of St. Louis, speaks before the Foreign Correspondents' Club of Hong Kong in Hong Kong, China May 22, 2019. REUTERS / Noah Sin
The risk of the Fed missing its 2% inflation target and the trade war were two key macroeconomic challenges to the Federal Open Market Committee (FOMC) policymaking, he said in a presentation prepared for an audience at the Foreign Correspondents' Club (FCC) in Hong Kong.
The Fed has held interest rates steady earlier in May when President Jerome Powell said there was no "strong case" for either cut or hike in interest rates.
But Bullard said on Wednesday, "a downward policy rate adjustment even with relatively good real economic performance may help maintain the credibility of FOMC's inflation target going forward."
"A policy rate move of this kind may become a more attractive option if inflation data continues to disappoint, "he said.
Bullard and Chicago Fed's Charles Evans, both voting members of the FOMC, have recently expressed concerns over Fed's failure to meet its target. Bullard said on Wednesday that another 'low-side miss' is on the horizon in 2019.
Bullard said any policy adjustment going forward would be in response to incoming data, and not a continuation of the normalization process rate that stopped earlier this year after 225 basis points worth of hikes from near zero levels.
He remained upbeat about growth prospects.
Bullard drew comparisons with 2-1 / 2 decades ago – when rates were increased by 300 basis points between early 1994 and early 1995, and the economy still boomed during the second half of the 1990s – to stress that rate normalization can be accomplished without damaging prospects for a long period of growth.  The next FOMC meeting will be convened on June 18. [FED/DIARY]
Bullard expects agreements on trade to be reached in the near term, but warned that failure to do so with substantial barriers "erected and maintained , "Could alter" global trading patterns over the medium term ".
These unresolved trade disputes and the below-target inflation "suggest that the FOMC needs to be vigilant in order to help sustain economic expansion," he said.
Bullard said that from a macroeconomic perspective, China should agree on "everything that is being asked" in the negotiations because it would lead to a domestic economic boom.
"They will establish credibility on trade inside China, and will reassure foreign investors that they can invest in China and be treated appropriately. If that happens, I would see the blue skies ahead for the Chinese economy, "Bullard said.
"It's Not Just The U.S. that's doubting Chinese credibility. "
In an interview with Bloomberg TV earlier on Wednesday, Bullard said the tariffs would have to stay on for" something like six months "with no prospect of a resolution in sight to weigh on the Fed policy.
In his FCC remarks, he added China selling his large stock of U.S. Treasuries were not "as big of a threat as it was made to be" as it would be hard to replace them with other assets.
Editing by Jacqueline Wong