James Bullard, former CEO and 12th president of the Federal Reserve Bank of St. Louis, “likes” the market estimate of between one and two rate cuts so far.
“This latest inflation report did bring September back into play,” he says, adding that the latest inflation numbers went in the favour of those who were hoping for an earlier move by the US Federal Reserve. Bullard was speaking with Tan Min Lan, head of UBS’s chief investment office in Asia Pacific (APAC), at UBS’s mid-year outlook on June 21. He was the former CEO and president of the Federal Reserve Bank of St. Louis from 2008 till 2023 before joining the school of business at Purdue University.
“But, by the same token, the committee can be patient, so they’ll wait for additional inflation reports to go through the North American summer here. Then they’ll make a decision at that point,” he adds.
On UBS’s chief investment office’s (CIO) forecast that the US Fed will cut rates twice in 2024 – in September and December and one cut per quarter in 2025, Bullard says the path is a possible one, although noting that no one will really know what’s going to happen.
“But I think that’s possible based on the data we have today and everything we know about the Fed’s plans today. It’s not too bad a plan,” he notes.
In an interview with Bloomberg TV in April this year, Bullard said, at the time, that he was expecting three interest-rate cuts in 2024 as inflation lowers towards the US Fed’s 2% target.
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While the timing of the US Fed’s rate cuts is anyone’s guess, Bullard thinks it is unlikely for the Fed to hike rates.
“I don’t think that’s likely. I think that… if [the Federal Open Market Committee] wants to have a more hawkish policy, [the committee] can just keep the policy rate where it is as inflation continues to decline and that would be enough downward pressure on inflation given where inflation is at today,” he says. “So I think there’s not really any call or necessity to go higher. They could just delay any easing that would otherwise occur.”
US growth outlook to remain ‘robust’
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The former Fed St. Louis president also expects the growth outlook for the US to remain “robust”.
“The main surprise in the US… came in the second half of 2023. It was a big surprise because, as you know, the markets were anticipating a recession in the second half 2023, which didn’t happen. Instead, the economy boomed [over] 4% growth at an annual rate over the second half of 2023,” he says.
He adds that while the US economy slowed down a little bit in the 1H2024, it still saw “pretty rapid growth”. In the 1Q2024, the US’s real GDP increased at an annual rate of 1.3%.
“I’d say above trend growth would be expected for the first half of 2024 on the whole, and that’s feeding into very good labour market outcomes and other good things in the US,” he says. However, he notes that the US economy won’t grow above trend and will start seeing a slowdown but only to the trend base.
“I think that realisation has been settling in [the] global financial markets that instead of slowing down and eventually going into a recession, you’re just talking about slowing down to the trend pace of growth, which would be around 2% for the US. So that’s probably the best outlook,” he adds.
When asked whether he expects the US to see a “soft landing”, he replied that he’s “definitely in the ‘soft landing’ camp”.
He notes that in 2022, the US Fed tackled inflation aggressively with four 75 basis point (bps) increases in a row. Chairman Jerome Powell’s speech at Jackson Hole in August 2022 also focused on inflation, which was a shift from the focus on the labour market just the year before.
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The moves, which were “dramatically focused” on the US getting back to the Fed’s 2% inflation target, paid its dividends in 2023 as inflation lowered to 3.9%, down from 5.7% in 2022.
On May 15, the US reported that its April core consumer price index (CPI) rose by 0.3% m-o-m, in line with the median estimate. On a y-o-y basis, the country’s core CPI was up by 3.6%.
“A lot of this inflation… it didn’t quite finish after the first half of 2024, so it’s been a bit sticky, but I think disinflation will now resume as it did in the last inflation report in US. And that will allow committee to go ahead with its rate cut plan during the second half of 2024 and into 2025,” he says.
When asked about the resilience of the US stock market amid the high core inflation, Bullard noted that it’s been a “very good outcome” and that not everyone thought that it was doable.
“The fact is, if a central bank acts aggressively and swiftly, this can bring inflationary rate down pretty quickly without going into recession,” he says.
“A simple way to think about that would be the Fed was threatening a recession. But you know, forward looking firms and forward-looking households anticipated that and moderated their inflation expectations rather quickly,” he adds. “And as a result, random price increases fell before any recession actually occurred. So you ended up with inflation, backing up disinflation, they're calling it. The game's not quite over yet, because inflation is still is running between 2.5% and 3% on the Fed’s preferred measures. But still, a lot of progress has been made.”
