The Federal Reserve may need to cut interest rates to boost inflation and regain credibility if inflation remains sluggish beyond the second quarter, St. Louis Federal Reserve Bank President James Bullard said on Friday.
Bullard voted with the rest of the Fed`s policymakers on Wednesday to keep rates on hold, a move he said was justified because the Fed already made a "huge" policy shift in January by taking off the table the expectation it would raise interest rates this year.
"If we go through the summer here and inflation expectations are still too low and actual inflation doesn’t seem to be picking up then I think the level of my concern would get more intense," Bullard told Reuters in an interview.
"I am open to a rate cut to try to combat this – but it would be a rate cut not because of bad data on the US economy – it would be a rate cut because we want to make sure that inflation expectations and eventually actual inflation is more consistent with our 2-percent target," Bullard said, adding that he would not view such a rate cut as taking out insurance against a possible bad outcome, as some analysts have suggested the Fed might do.
Instead, he said, it would be a move that would build credibility and help the Fed fight future downturns.
"If you cut rates during boom times that would send a signal you are serious that you are trying to get inflation at 2 (percent) or above our target" of 2 percent. Cutting rates at a time that job growth is weak would be "less successful" at building such credibility, he said.
Inflation by the Fed`s preferred gauge recently came in at 1.6 percent, despite an unemployment rate that has sunk to a 50-year-low of 3.6 percent.
(This article has not been edited by Zeebiz editorial team and is auto-generated from an agency feed.)