MNI INTERVIEW: Oil Prices Won't Disrupt Fed Pause - Bullard

The Iran war and rising oil prices are significant but manageable risks and unlikely to fundamentally alter Federal Reserve policy or the U.S. growth picture, former St. Louis Fed President James Bullard told MNI on Friday.

Energy prices would need to rise "substantially higher" than current levels to materially change the economic outlook, he said in an interview, noting that the U.S. economy successfully handled equally-high oil prices in real terms during the 2003-2004 period and has become less energy intensive due to a shift toward services and away from manufacturing. 

"To get on the same basis as that time period, you would need more energy intensity than we have, and you would need USD200 oil," said Bullard, now dean of Purdue University's Daniels School of Business. "The FOMC will want to watch very closely what's going on, but I think they'd feel relatively confident that this would not flow through to underlying inflation." 

Oil shocks themselves do not cause long-term inflation, though a central bank that eases too much to accommodate the shock would be problematic, Bullard said. 

"In the 1970s, it’s the Fed’s reaction to the oil shock," he said. "I’m not sure we’re really talking about an oil shock yet, even at USD100 a barrel, but if it went substantially higher from here, we would be. Then if the Fed said, ‘we’re going to accommodate that and have too easy of a policy,’ then you would get a lot of inflation."

Having already cut interest rates by 75 basis points at the end of 2025, the FOMC "is likely to want to see the effects before they make more moves," he said. "They’ve already eased. They’ve got their inflation target that they didn’t have in the 1970s, and they’ve got credibility that they didn’t have in the 1970s. So I think it’s a very different calculation than at that time." (See: MNI INTERVIEW: Fed On Sidelines, Awaiting Clarity - Kaplan)

RECESSION UNLIKELY

Bullard reckons a U.S. recession is unlikely, though sharp declines in Europe and Asia could feed through and result in a U.S. slowdown. 

A complete disruption in oil shipments through the Strait of Hormuz that causes major global shutdowns would be a more fearsome scenario than price spikes alone, he said. 

"If you wanted to tell a recession story, it would have to be a global story that would then come back to bite the U.S. I haven’t seen people saying that so far, and that’s kind of a roundabout way to get to a recession in the U.S.," he said. 

Labor market data are also benign, despite a surprisingly bad month of job losses in February, Bullard said. The economy lost 92,000 jobs last month and the jobless rate edged up to 4.4%.

The breakeven rate of payroll growth is likely around 30,000 or lower, weekly unemployment claims have stayed remarkably low and stable, and the unemployment rate is "pretty close to the natural rate," Bullard said. 

"The labor market is basically in equilibrium. It’s not the equilibrium that we’re used to, but that’s because the immigration policy is quite a bit different from what it has been historically," he said. "Right now there’s not much stress in the labor market."