Fed's Bullard Shrugs Off Greek Events, Points to Chance of Sept Rate Increase

        By Michael S. Derby
        Federal Reserve Bank of St. Louis President James Bullard said Tuesday Greek economic problems are unlikely to affect the U.S., leaving the Fed on track for rate rises later this year.
        What's happening in Europe "would not change the timing of any rate hike. I would say September is still very much in play" for raising rates, Mr. Bullard told reporters after a speech in St. Louis. More broadly, he said "every meeting is in play depending on the data," which he said had been "stronger" recently. He also described recent inflation data as being "more lively" and set to rise further over time.
        Mr. Bullard added that against crisis events in Europe, he's actually grown more bullish on the U.S. outlook. Alluding to weak data at the start of the year, he said "the idea there was some major slowing in the U.S. economy has been dismissed at this point, therefore I do feel more confident" about what lies ahead.
        Mr. Bullard spoke with reporters as Greece defaulted on required payments to the International Monetary Fund, amid political brinksmanship over the terms of a deal that would work to keep the troubled nation in the European Union. Some have worried trouble there could roil the world economy and wound the U.S. as collateral damage, affecting the Fed's desire to raise rates this year.
        Mr. Bullard said he wasn't that worried about Greece, either for the U.S. or Europe. "I think that the risk of contagion to the rest of Europe from Greece is low" because the European Central Bank can address any trouble with its ongoing bond buying stimulus program, he said.
        What's more, "I see the U.S. as being a likely beneficiary of the situation in Greece. It's not that I take joy in that, but that's the way the global macro economy tends to work," Mr. Bullard said. He noted that trouble tends to send investors into U.S. bonds, which lowers borrowing rates in the American economy. Offsetting that to some degree is the impact of uncertainty, he said.
        Mr. Bullard is not currently a voting member of the interest rate setting Federal Open Market Committee. Most officials support boosting the Fed's short-term interest rate target off near zero levels this year, but Greek events have introduced some uncertainty into that outlook.
        In Mr. Bullard's prepared remarks, he warned very low interest rates could create problems in the financial system, and suggested that in the future the U.S. central bank may need to set short-term rates at higher levels than would normally be the case to mitigate those risks.
        "The Fed should hedge against the possibility of a third major macroeconomic bubble in coming years by shading interest rates somewhat higher than otherwise" would be the case based on historical norms, Mr. Bullard said. "The benefit would be a longer, more stable economic expansion."
        Mr. Bullard warned "my view is that low interest rates tend to feed the bubble process." He did not point to any major imbalances right now even as he flagged high stock market levels as something to watch, acknowledging the role of technology could be changing how the economy interacts with financial markets.
        Mr. Bullard's suggesting that rates may need to be lifted more aggressively in the future puts him at odds with some of his central bank colleagues. Many key Fed officials are now gravitating to the view that changes in labor market demographics and other forces may mean the Fed could keep rates at a lower level relative to historic benchmarks. Most officials now expect that the long-term fed funds rate target, now at near zero levels, will likely stand at around 3.75%.
        (END) Dow Jones Newswires

        June 30, 2015 20:24 ET (00:24 GMT)

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