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Bullard Explains Preference For Bigger Interest Rate Cut

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St. Louis Federal Reserve President James Bullard was one of three voting members of the Federal Open Market Committee that voted against the Fed's quarter-point rate cut on Wednesday, preferring a more substantial rate cut than his colleagues.

Bullard explained his preference for a 50 basis point rate cut in a statement on Friday, citing signs that U.S. economic growth is expected to slow in the near horizon.

"Trade policy uncertainty remains elevated, U.S. manufacturing already appears in recession, and many estimates of recession probabilities have risen from low to moderate levels," Bullard said.

He added, "Moreover, the yield curve is inverted, and our policy rate remains above government bond yields for nearly every country in the G-7."

Bullard also pointed to tame inflation, noting readings on consumer price growth continue to run well below the Fed's 2 percent target and that inflation is expected to remain muted.

"In light of these developments, I believe that lowering the target range for the federal funds rate by 50 basis points at this time would provide insurance against further declines in expected inflation and a slowing economy subject to elevated downside risks," Bullard said.

He continued, "It is prudent risk management, in my view, to cut the policy rate aggressively now and then later increase it should the downside risks not materialize."

Reflecting a divide at the Fed, Kansas City Fed President Esther George and Boston Fed President Eric Rosengren also voted against the 25 basis point rate cut, although they preferred to leave rates unchanged.

The Fed's economic projections suggest that the meeting participants were also divided about the outlook for interest rates.

While seven participants expect another rate cut before the end of year, five expect rates to remain unchanged and another five expect rates to be raised back to 2 to 2-1/4 percent.

Bullard's views on monetary policy seem slightly more in line with those of President Donald Trump, who has urged the Fed to slash interest rates to zero or less

"Jay Powell and the Federal Reserve Fail Again. No 'guts,' no sense, no vision! A terrible communicator!" Trump tweeted shortly after the more modest rate cut.

Fed Chairman Jerome Powell said in his post-meeting press conference that the central bank is prepared for a more "extensive sequence of rate cuts" in the face of an economic downturn but noted that is not currently expected.

Powell also told reporters that he does not foresee the Fed using negative interest rates as a policy tool, as Trump has suggested.

"If we were to find ourselves at some future date again at the effect of a lower bound, again not something we are expecting, then I think we would look at using large scale asset purchases and forward guidance," Powell said.

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