A modest slowdown of the global financial markets in 2018, could turn into a more significant slowdown in the coming year, according to the St. Louis Branch of the Federal Reserve.
James Bullard, president of the St. Louis branch of the Fed presented an overall economic outlook Thursday as a part of the Little Rock Regional Chamber’s Power Up Little Rock event at the Clinton Presidential Library.
In the presentation, Bullard said the nation’s overall economic performance did better than expected in 2017 and 2018. This better than predicted performance has led to multiple interest rate raises by the Fed. The most recent raise happened in December, the fourth time the Fed raised its rates in 2018, a raise that Bullard did not agree with.
“What I think happened was, that the economy surprised to the upside and that enabled the Fed to normalize the policy rate, and because of the upside surprise, I would have gone along with those rate increases, up until the December meeting where I think it was a bit of an overreach,” Bullard said.
Despite the better than predicted economic performance, the inflation rate has remained low. It is predicted that the Federal Open Market Committee will miss its target inflation rate for the eighth year in a row.
This missing of the inflation rate target is a sign that U.S. monetary policy may be too aggressive considering current data.
According to Bullard, the global economy was modestly slower than expected during 2018. The International Monetary Fund reduced its forecasts for many areas outside the U.S., most of that in Europe. And while China’s forecast was not lowered, a decrease in both Chinese investment and retail sales suggest China’s economy is slowing down as well.
While the partial government shutdown is economically affecting workers on a personal level, Bullard does not believe the shutdown will affect the country on a macroeconomic level.
“I think we should be concerned for the people that are caught up in it, but I don’t think we should exaggerate the macroeconomic consequences,” Bullard said.
Bullard says he is concerned the country could be on the verge of a damaging economic mistake.
“I am concerned that we’re on the precipice of a policy mistake here. We have normalized rates, Bullard said, I think we’re still okay today, but if we press too much harder going forward and substantially invert the yield curve, that could presage a downturn in the U.S., and that could possibly be very damaging at this stage.”
The yield curve, the line that plots interest rates, normally has higher rates on long-term bonds compared to short-term bonds. However, the yield curve has been flattening over the years and an inverted yield curve, where the short-term bonds have a higher rate, could be a bad sign economically.
According to Bullard, this inversion suggests financial markets expect less inflation and less growth for the US economy than the Federal Open Market Committee. Furthermore, an inverted yield curve tends to precede an economic recession.
Overall, Bullard recommends that the FOMC should pay attention to these economic trends and signals to keep the US economy on track.