ST LOUIS • It would be "unwise" for the US Federal Reserve to continue hiking interest rates, given declining inflation expectations and recent equity market volatility, St Louis Fed president James Bullard has said, marking a stark change of direction for one of the central bank's more hawkish inflation foes.
Mr Bullard for much of last year argued for an earlier rate hike, but now feels key assumptions supporting higher rates have been undermined.
Inflation expectations have fallen "too far for comfort", making it more probable inflation itself will fall and continue to miss the Fed's 2 per cent target, he said on Wednesday, in remarks prepared for delivery to financial analysts. "I regard it as unwise to continue a normalisation strategy in an environment of declining market- based inflation expectations."
In addition, declining equity prices and other tightened financial conditions have made dangerous asset bubbles "less of a concern over the medium term".
Taken together, he sees them likely giving the policy-setting Federal Open Market Committee "more leeway in its normalisation programme", he said.
Recent comments by Fed officials already made it seem unlikely the US central bank would raise rates when it next meets in March, but Mr Bullard's comments indicate concern over the conditions facing the Fed.
Mr Bullard, who votes on the rate-setting committee this year, has been among the stronger advocates of higher rates, but feels the case has grown weaker since the Fed's "lift-off" hike in December.
"Two important pillars of the 2015 case for US monetary policy normalisation have changed."
His comments echo the fears raised by Fed officials at their last policy meeting. According to minutes of that session, they discussed whether a more volatile global environment would throw their outlook for rates off track.
Investors have already pushed expectations for a second Fed rate hike deep into 2016.
Mr Bullard also said it may be time for the Fed to consider the value of its quarterly rate path projections.