Fed's Bullard: Hard to raise rates far beyond other banks

TOKYO: The US Federal Reserve will have difficulty raising interest rates significantly beyond the settings of its Japanese and European counterparts, which are still pursuing accommodative policy, St Louis Fed president James Bullard said yesterday.

Mr Bullard, who has previously flagged the need for a caution in raising rates, told reporters on the sidelines of a seminar in Tokyo yesterday that the Fed had enough tools and policy options to respond if the US economy falls into a recession.

He said in a speech earlier that day that US interest rates may have already hit the "neutral" level that neither encourages nor discourages economic activity.

"It is hard for US rates to get too far out of line with the global rate situation, and both the (Bank of Japan) and the (European Central Bank) are continuing accommodative policies," he said.

Mr Bullard said he did not want to prejudge the Fed's next meeting next month, but he reiterated his view that the Fed does not need to raise interest rates further because inflation expectations are low.

The Fed held interest rates steady in a target range of between 1.5 per cent and 1.75 per cent on May 2. It is expected to raise rates next month.

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In prepared remarks, Mr Bullard repeated his views that inflation expectations remain a bit below the Fed's 2 per cent inflation target, and that interest rates worldwide are being held down by longer term economic and demographic trends.

There are "a few reasons for caution" in further rate increases, said Mr Bullard.

If the current policy rate is at neutral, "it may not be necessary to change the policy rate" in order to keep the economy close to or at the Fed's goal, he said.

Holding off on further rate increases, Mr Bullard said, would help improve market-based measures of inflation expectations and make the Fed's commitment to meeting its inflation target more credible. - REUTERS