MarketWatch Interview: Fed’s Bullard says delta COVID variant won’t derail economy

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The U.S. economy won’t be derailed by the spreading delta variant of the coronavirus that causes COVID-19 because businesses and households have adapted to the pandemic, St. Louis Fed President James Bullard said Wednesday in an Barron’s Live interview with MarketWatch.

“The economy has clearly adapted to the pandemic situation. Businesses have found ways to produce their products and services and households have found ways” to continue consumption,” he said. (Watch the interview here.)

“I don’t see the delta variant stopping that process,” he said.

On Tuesday, Fed Chairman Jerome Powell was more cautious about the delta variant, saying it was still unclear how it might impact the economy.

Bullard said the economy has already made “substantial” progress — the benchmark for tapering the central bank’s $120 billion a month in asset purchases.

“We’ve made a lot of progress. Every indication is that labor markets are about as tight as they ever get,” Bullard said.

“We should get going on the taper,” he added.

The St. Louis Fed president, who will be a voting member of the Fed’s policy committee in 2022, said he wants the tapering to finish by the end of March. That would give the Fed the option to begin to raise interest rates if inflation remained stubbornly high.

“That’s a good checkpoint. We could assess the situation and we can see if inflation is moderating,” Bullard said.

Going slower and ending the tapering later raises the “clear risk” of the Fed will have to move “in rapid fashion” to put downward pressure on inflation, he said.

Inflation should decelerate to above a 2.5% rate in 2022 from above 3% this year, but the risks of higher inflation were greater than of too-low inflation, he said.

Bullard has penciled in the first interest rate hike in the fourth quarter of 2022.

In the interview, Bullard said he thinks the Fed should let its balance sheet shrink organically once the central bank has finished tapering.

That’s a twist from the Fed’s previous tapering episode in 2014. At the time, Fed officials wanted to see the central bank’s benchmark interest rate move substantially higher before allowing the balance sheet to shrink.

The balance sheet would shrink naturally if the Fed doesn’t replace securities that mature.

Bullard said he did not sense any support from his colleagues for the central bank selling bonds into the market.

The Bank of England has said it would start to consider selling bonds back to the market once its policy rate hits 1%.

Bullard said he opposed any move to raise the central bank’s inflation target to 3% from its current level of 2%. He said it would cause turmoil in financial markets. Earlier this week, several former Fed economists backed the move to a higher target.

The St. Louis Fed President said he was concerned that a bubble in the housing market could be forming.

“I don’t really think right now we’re in that much trouble right now,” but if the Fed continues its easy policy over another two or three years, there could be a problem, he said.

After the Bullard interview, the Fed released the minutes of its July meeting showing that “most” Fed officials think tapering can begin this year.

U.S. stocks were mostly lower on Wednesday following losses in the prior trading session, which saw the S&P 500
SPX,
-1.07%
and the Dow Jones Industrial Average
DJIA,
-1.08%
both snap streaks of five consecutive record finishes.

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