St. Louis Fed chief bullish on U.S. economy, makes case for interest rate hike

While it may sound counterintuitive, the president and CEO of the Federal Reserve Bank of St. Louis said Friday (Nov. 20) that the pace of job growth is likely to slow in the coming months but the U.S. economy is about to enter a “boom period.”

James Bullard, who has been with the Federal Reserve since 2000 and named head of the St. Louis bank in 2008, addressed a large crowd at the University of Arkansas at Fort Smith in an event hosted by the university and the Fort Smith Regional Chamber of Commerce.

For Fed watchers, it’s not a surprise Bullard is bullish on the economy. He’s one of the more outspoken members of the central bank’s Federal Open Market Committee – the group that, among other things, sets interest rates – in terms of moving away from its near-zero interest rate policy. Many Fed watchers say the FOMC will raise rates in the December meeting. The Fed rate has been near or at zero percent for seven years, far longer than most anticipated following stimulus actions taken by the Federal Reserve Bank after the Great Recession.

‘A BOOM PERIOD’
Bullard believes the Fed has room to raise the interest rate because the U.S. economy is on better footing.

“The economy is going to go into a boom period,” Bullard told the audience, and then paused before adding: “That may sound strange to you.”

Earlier in his remarks Bullard said the U.S. has “many more years to go on our economic expansion.” Bullard’s confidence is a result of several factors, including labor markets that have “largely normalized,” financial stress moderating from levels of the past five years, and oil price “stabilization.”

As to the labor markets, Bullard said recent monthly job creation averages will decline from at or above 200,000 jobs to a more normal 125,000 level.

“But that’s not going to be bad news for the U.S. economy,” Bullard said, adding that a decline in average growth means the economy is healthier and returning to normal.

In a short Q&A with the media after his speech, Bullard said he is ready to get back to the “equilibrium” of interest rate cycles of the 1980s and 1990s.

LABOR FORCE, CONSUMER SPENDING
He does predict the nation’s labor force participation rate will continue to decline for the next 5-10 years thanks to an ongoing demographic shift in which more people are retiring out of the workforce than entering. Bullard said the participation rate began to grow in the 1960s when women began entering the workforce and other demographic changes added to the pool of workers.

“That process had to come to an end at some point,” Bullard said, noting that the point was around 2000.

Indeed, U.S. Bureau of Labor stats show the labor force participation rate (those age 16 and over) hit a ceiling of 67.3 million in early 2000, and has declined to 62.4 million in October.

Bullard also is bullish on consumer spending despite recent federal data and reports from retailers that consumers have become more stingy. The U.S. Department of Commerce reported personal consumption expenditures in September rose just 0.1%, following a 0.4% gain in August. Economists with Goldman Sachs say the growth in consumer spending will decline in 2016 from a range of 3%-3.5% to 2%-2.75%. However, Bullard said in an interview with the media after his speech that labor market gains and lower fuel prices are some of the factors that will result in “strong” consumer spending patterns in the fourth quarter.

“It’s (consumer spending) actually a bright spot for the economy,” Bullard told the media.

REACTION
Sam T. Sicard, president and CEO of First Bank Corp., which has operations in the Fort Smith and Northwest Arkansas areas, did not expect Bullard to be so positive about economic conditions.

“I was a little surprised as to how bullish he was, but it does point to … a strong indication that they (FOMC) don’t think the stimulus from having zero rates is still needed, and they are going to slowly unwind some of the monetary actions they took to stimulate the economy,” Sicard said.

Andy Smith, with Arvest Asset Management, said what he heard from Bullard reinforces his belief that a rate hike is coming soon.

“They are probably going to pull the trigger in December. That’s what I took away from it,” Smith said. “And that’s probably a good thing. … They’ve been needing to do this for some time. The markets have had it factored in, the markets have been expecting it, so it needs to be done.”

Sicard also was pleased with Bullard’s note that the Federal Reserve may slowly reduce its balance sheet from $4.5 trillion back to something closer to the $800 billion prior to the recession. The increase resulted from the Fed buying securities – like mortgage-backed securities – other than Treasury notes in an effort to inject capital into the economy.

“What I heard was a pragmatic and disciplined approach to gradually unwinding. And I like that. … I don’t think we should do anything radical,” Sicard said.

OTHER SPEECH NOTES, REMARKS TO MEDIA
• Federal road money
When asked about a Congressional plan to fund highway improvements with Federal Reserve proceeds, Bullard said it was a “bad idea.” The highway bill now in conference committee seeks to balance spending on highways and mass transit by tapping into cash – possibly generated by fees banks pay to be members of the Federal Reserve – held by the Federal Reserve. Bullard said money for highways should come from users and not another segment of government.

• National deficit/debt
Bullard said the U.S. economy would see significant gains if the White House and Congress could get government debt under control. However, he said “political gridlock” prevents substantive action to reduce deficit spending trends.

• U.S. tax code
When asked by a Times Record reporter about money held overseas by U.S. companies, Bullard said the U.S. tax code should be amended to become more consistent with international rules.

“I think that would help us a lot,” Bullard said about getting money returned to the U.S. and injected into the economy.

• Changing workplace
During his comments about the labor force, Bullard said the nature of work has changed, with technology and new business practices changing the conventional workday cycle. He said economists may need to reconsider how workforce numbers are measured.

Link here to a copy of Bullard’s formal presentation in Fort Smith.