MNI INTERVIEW: A Few Fed Cuts Likely By Year-End - Bullard

The Federal Reserve is likely to cut interest rates a few times by the end of the year as tariffs cause a meaningful U.S. slowdown in the second half, but huge trade policy uncertainty could also see outcomes as dire as a global recession or as bright as a domino effect of trade deals, former St. Louis Fed President James Bullard told MNI. 

"You can’t make a very good baseline prediction, but I still think the base case would be somewhat lower inflation by the end of the year and a few rate cuts," Bullard said in an interview. 

During Trump's first-term trade war, inflation declined in the first half of 2019 and the real economy stumbled, he noted. "By the time you got to midsummer, it was pretty apparent there was a slowdown, and the FOMC reacted to that by lowering the policy rate. That gives you a roadmap on what can happen this time." 

Bullard's view aligns with that of Fed Governor Chris Waller, who has also emphasized the real effects of the trade war over the potential price effects – with dovish outcomes for interest rate policy. 

FED ON HOLD

Firms would be reluctant to raise prices if demand was cooling, said Bullard, now Dean of Purdue University's Mitch Daniels School of Business. "They may lose a lot of customers doing that, and the cost of customer acquisition is very high so you'd lose them for a long time. I think most firms would make a decision to not pass through the tariff immediately to prices if they thought a recession was on the horizon." 

Until the full effects of tariffs show up in the macro data in the third quarter, the Fed will likely have a bias toward a wait-and-see stance on rates, Bullard said. (See: MNI INTERVIEW: Fed On Hold For A While, Rate Direction Unclear)

The FOMC would be loathe to retrace policy moves, and if individual countries try to resolve the trade war quickly by making deals with the United States, much of the uncertainty could dissipate, he said. 

"There's some upside not being priced into markets, which is everyone more or less signs on to a similar solution and the U.S. is satisfied with that, and the global economy booms," he said. An end to the Russia-Ukraine conflict could also boost Europe and the world outlook, he said. 

CHINA

On the worst case scenario front, Bullard said a protracted U.S.-China trade clash would lead to a global downturn. 

China so far responded to Trump's punches by raising its tariffs on U.S. goods rather than coming to the negotiating table. U.S. tariffs as high as 145% on Chinese imports came into effect this month and Beijing in turn placed 125% duties on U.S. imports. 

That's cause for concern, Bullard said. 

"You’re flirting with the possibility that China plus other countries decide not to negotiate or not negotiate very seriously with the U.S., and the trade war gets extended and goes all through this year and next. That’ll lead to a slowdown, a global recession," he said. "It’s a high stakes game and it could work out badly."