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Fed’s Bullard: Rates may be cut if weak inflation continues

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HONG KONG : Further weakness in inflation could prompt the US Federal Reserve to cut interest rates, even if economic growth maintains its momentum, Mr James Bullard, president of the Federal Reserve Bank of St Louis, said yesterday.

The risk of the Fed missing its 2 per cent inflation target and the trade war were key macroeconomic challenges to the policy-setting Federal Open Market Committee (FOMC), he said in a presentation prepared for an audience at the Foreign Correspondents' Club in Hong Kong.

The Fed held interest rates steady earlier this month, when chair Jerome Powell said there was "no strong case" for either a cut or hike in interest rates.

But Mr Bullard said yesterday "a downward policy rate adjustment even with relatively good real economic performance may help maintain the credibility of the FOMC's inflation target going forward".

"A policy rate move of this sort may become a more attractive option if inflation data continue to disappoint," he said.

Mr Bullard and Chicago Fed's Charles Evans, both voting members of the FOMC, have in recent days expressed concerns over the Fed's failure to meet its target. Mr Bullard said yesterday another "low-side miss" is on the horizon in 2019.

Mr Bullard said any policy adjustment going forward would be in response to incoming data, and not a continuation of the rate normalisation process, which stopped earlier this year after 225 basis points worth of hikes from near zero levels.

He remained upbeat about growth prospects. Mr Bullard drew comparisons to the past - when rates were increased by 300 basis points between 1994 and 1995, and the economy still boomed during the second half of the 1990s - to stress that rate normalisation can be accomplished without hurting prospects for an extended period of growth.- REUTERS