Bullard says investors wrong not to expect rate rise by mid-year

[ATLANTA] Federal Reserve Bank of St. Louis President James Bullard said the Fed may start raising interest rates by midyear in response to a growing economy and falling unemployment, and investors are wrong in looking for a later increase.

"The market has a more dovish view of what the Fed is going to do than the Fed itself," Bullard said in an interview Friday in New York. "Markets should take it at face value" from the Fed's rate projections, and it's "reasonable" to expect an increase in June or July.

The Federal Open Market Committee said two days ago it would be "patient" in its plans to raise rates, which Chair Janet Yellen said in December meant no tightening "for at least the next couple of meetings." The central bank described the expansion as "solid," while cautioning that inflation could decline further "in the near term." The "patient" language could be removed at one of the next two meetings, setting up a discussion on rate increases by midyear, Bullard said. Unemployment could fall below 5 per cent by the third quarter, he said, adding that both policy makers and private economists have been overly pessimistic in their forecasts for joblessness.

"Zero is not the right number for this economy," Bullard said in a reference to the benchmark federal funds rate, which has been kept near that level since December 2008. "It is hard to rationalize a zero policy rate" because the economy has "a lot of momentum." Bullard, 53, has been seen as a bellwether because his views have sometimes foreshadowed policy changes. He published a paper in 2010 entitled "Seven Faces of the Peril," which called on the central bank to avert deflation by purchasing Treasury notes. That was followed by a second round of bond buying.

Bullard joined the St Louis Fed's research department in 1990 and became president of the regional bank in 2008. His district includes all of Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.

BLOOMBERG