Having saved the world markets from a 10% correction fate worse than death (or recession) in October with 'hints' of reigniting QE4, The Fed's Jim Bullard is back to his jawboning best. Blaming The ECB's looming unconventional policy move for the global bond market rally (as opposed to collapsing growth and disinflation), Bullard proclaims the domestic US economy is doing well with tailwinds from low rates and oil prices (just don't tell the 7,000 Baker Hughes workers this morning) and tells WSJ's Jon Hilsenrath that he wants to “get going” with rate increases warning that the funds rate is 400bps below normal.
Via The Wall Street Journal, [10]
Mr. Bullard said U.S. long-term rates are being pulled down by global factors, and not new threats to the domestic economy. He wants to “get going” with rate increases. Below are excerpts of the interview with Mr. Bullard:
WSJ: This drop in 10-year Treasury bond yields, how are you thinking about what’s driving that and what signal it’s sending?
MR. BULLARD: There has been a global bond rally over the last year and I think most of that is due to the specter of ECB quantitative easing. At the beginning of 2014 people were expecting the euro area to have a relatively good year. It was supposed to be the year of recovery and growth. When we got to midyear it was not so much and the inflation numbers in particular continued to decline and that just got worse. So the probability of the ECB going to unconventional monetary policy started to get higher and higher. I think that has been the primary driver of the global bond rally and that has pulled U.S. rates down with it.
WSJ: Does it tell you anything about the U.S. economy and in particular the outlook for U.S. inflation?
Mr. BULLARD: No I don’t really think so because I think it is being driven by the specter of ECB quantitative easing. I don’t think it is really a signal of U.S. economic strength. The U.S. data has been quite good. We’ve got consumer sentiment at an 11 year high, growth probably 4%-plus over the last three quarters, jobs growth best since 1999 in 2014, unemployment at 5.6% and falling, a lot of good numbers on the U.S. economy. Plus oil is down 50%. That is a positive for the U.S. economy. Plus you’ve got the global bond rally driving U.S. interest rates down. So there are a lot of good things going on in the U.S. economy, plus we’ve got these tailwinds from the oil situation and from the longer-term interest rate situation. I think all of those are very bullish for the U.S.
...
WSJ: Do any of these developments in 10-year yields, or breakevens or headline inflation give you any pause about raising rates this year?
MR. BULLARD: I still think we should get off zero (interest rates). The kinds of things we’re observing now, it is not the constellation of data that would be consistent with a zero policy rate. I think it is important to get started and to start normalizing policy. Even once we start to normalize, interest rates would still be extremely low. We’re talking about levels of 50 basis points or 75 basis points. That is still extremely low and that would still be putting upward pressure on inflation even if we did that. So I’d like to get going. I don’t think we can any longer rationalize a zero interest rate policy.
What I would be willing to do is adjust the frequency of rate hikes and adjust the pace of the normalization process in reaction to data, so that if inflation indeed does not behave the way we think it will, we can pause in that process and reassess at that point. I’d like to make the pace of tightening be more data dependent than it would have been in 2004 to 2006.
...
MR. BULLARD: It is important to acknowledge the improvements in the real economy that have occurred. We really had a pretty good year in 2014. We have had a dramatic fall in unemployment, good jobs gains, pretty good economic growth. The thing about the funds rate is it is 400 basis points below normal. We’ve really got an emergency setting for the policy rate right now and we don’t have an emergency constellation of data anymore.
So roughly translated: instead of buy stocks because QE4 is coming... Bullard is sell bonds because we're gonna raise rates any minute you greater fools... and when we do that is awesome for stocks, so greatly rotate...
