By Howard Schneider
WASHINGTON (Reuters) - After the U.S. central bank reshaped monetary policy around global trade volatility, a Federal Reserve official offered a message to the White House on Tuesday: Don't expect more rate cuts every time trade policy threats or announcements send markets into a tailspin.
St. Louis Federal Reserve President James Bullard said the Fed's shift since the first of the year, from projecting continued rate hikes to cutting rates at its meeting last week, had made monetary policy "considerably" looser and had adequately offset the uncertainty caused by the U.S. trade spat with China, as well as related global developments.
"I don't think it is realistic for the Fed to respond to each threat and counter threat in a tit-for-tat trade war," Bullard said, referring to the current situation as a "Pandora's box" that will be difficult for the United States, China and other countries to resolve any time soon.
"We are taking a one-time increase in trade uncertainty on board," Bullard said in comments to the National Economists Club that indicate a more patient approach to additional rate cuts than he has previously shown.
Bullard dissented in June when the Fed did not cut rates, and has said he feels at least one more quarter-point cut is likely warranted before the end of the year.
But with the economy still adjusting to a looser stance by the Fed, Bullard said it was appropriate to "wait and see" how upcoming data "roll in" before deciding whether rates should be cut again at the Fed's next meeting in September.
If it remains warranted, he said it would be based on efforts to boost inflation and "steepen" a bond yield curve that continues to flag possible economic weakness through the narrow gap between short and long-term borrowing costs.
"U.S. monetary policy is considerably more accommodative than it was as of late last year," said Bullard, currently a voter on the Fed's policy-setting committee. “While additional policy action may be desirable, the long and variable lags in the effects of monetary policy suggest that the effects of previous actions are only now beginning to impact macroeconomic outcomes,” and may not be fully felt until next year.
The comments by Bullard, who was among the earliest advocates of the rate cut the Fed implemented last week, seemed to distance the central bank from the market's stark reaction to recent threats by President Donald Trump to raise tariffs on Chinese imports and to declare the country a "currency manipulator.
Markets rebounded somewhat on Tuesday, as White House officials said they planned to continue negotiating with China and remained open to a deal. But investors still feel the Fed will drive rates lower, with contracts tied to the federal funds rate pricing in two to three rate reductions by year's end.
"The Fed has been increasingly responsive this year to trade war threats, bond market expectations and global growth concerns," Goldman Sachs (NYSE:GS) analysts said in a note late on Monday in which they said they expect two rate cuts this year before the Fed pauses in December.
Bullard's comments also suggested that the Fed's reaction to a round of Trump trade threats in May - when Fed officials quickly signaled an openness to lower rates - may have been a one-off response to a higher level of uncertainty. Some analysts saw the events of May as the possible start of a difficult dynamic for the central bank in which Trump's sometimes unpredictable approach to trade negotiations became a way to influence the Fed to comply with his demands for lower interest rates.
Bullard, however, suggested the Fed has made its peace with that level of unpredictability in what it has done so far, noting there is little expectation the world will become more stable anytime soon.
"My whole mental picture of trade issues is that once you bring them up, they are difficult to put away," Bullard said.