FRB Bullard says insurance cut is needed to support inflation expectations

The head of FRB of St. Louis, James Bullard, said he crossed swords with most of his peers at the FOMC meeting this week, because he believes that anaemic inflation and uncertainty about the GDP growth outlook give grounds for a rate cut.

“Inflation rates have declined significantly since the end of last year and are now about 40-50 basis points below the 2 percent target of the Federal Open Market Committee,” said Bullard.

Inflationary expectations are also weak and risk to be deanchored so Bullard believes that “a reduction in the target range of the federal funds rate will now provide insurance against a further decline in expected inflation and a slowdown in the economy, which is subject to high downside risks.”

The Fed retained the key rate in the range of 2.25-2.50% following the results of the two-day meeting that ended on Wednesday.

However, in the new economic forecasts, the central bank indicated that during the rest of the year it could cut rates, possibly by half a percentage point. Futures on federal funds rate priced in the chance of rate to stay at current range 2.25-2.5% at 0%.