From Bloomberg

St. Louis Fed chief says trade war poses risk to U.S. economy, Bullard says yield curve may signal Fed policy is too tight

The Federal Reserve may need to cut interest rates soon to prop up inflation and counter downside economic risks from an escalating trade war, St. Louis Fed President James Bullard said.

“A downward policy rate adjustment may be warranted soon to help re-center inflation and inflation expectations at target and also to provide some insurance in case of a sharper-than-expected slowdown,” Bullard said Monday in remarks prepared for a talk in Chicago. “The direct effects of trade restrictions on the U.S. economy are relatively small, but the effects through global financial markets may be larger.”

Bullard’s comments mark the first time a Fed official has publicly suggested the need for a rate cut since the central bank put rates on hold in January to weigh headwinds facing the U.S. economy from slower growth abroad and an escalating trade war.

One of the most dovish members of the Fed, Bullard is a voter this year on the rate-setting Federal Open Market Committee, which meets next June 18-19 in Washington.

Minneapolis Fed President Neel Kashkari, who along with Bullard has most vocally opposed higher rates in recent years, said Friday during a Bloomberg TV interview that he was “not quite there yet” on the need for easing. Bullard said recently that a rate cut was premature.

The S&P 500 index of U.S. stocks extended losses Monday in early trading, taking it 7% below the record high achieved on April 30 amid weaker U.S. economic data and increasing concerns about U.S. President Donald Trump’s threats to further restrict global trade.

Fed officials are also worried about low inflation, which has persistently undershot their 2% target throughout most of the current economic expansion, and its effect on inflation expectations. They will gather with leading academics on Tuesday and Wednesday at a conference in Chicago to debate the problem.

“Financial markets appear to expect less growth and less inflation going forward than the FOMC does, a signal that the policy-rate setting may be too restrictive for the current environment,” Bullard said. “Even if the sharper-than-expected slowdown does not materialize, a rate cut would only mean that inflation and inflation expectations return to target more rapidly.”

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