Inflation eases, but Fed’s Bullard concerned with cutting interest rates

Although the Labor Department’s last report indicated an easing of inflation to 5.4% and a research group said on Thursday that September inflation pressures fell to a more than six-year low, a Fed president thinks lowering interest rates is not the answer right now.

“I think lowering interest rates right now, maybe, is not the right response,” James Bullard, president of the Federal Reserve Bank of St. Louis, told an audience in Bloomington, Indiana after giving a speech on Thursday.

The Federal Reserve is naturally inclined to raise interest rates to combat inflation, and lower them to reduce the pull of downward economic activity or recession.

"We’ve already lowered rates a lot. We’ve created this low interest rate environment. It is a blunt instrument … and you’ve got this brewing inflation problem that could get out of control if we don’t keep an eye on it," he told reporters.

Current investor expectations are for an interest rate cut by as much as half a percentage point at the next Federal Open Market Committee (FOMC) policy meeting on Oct. 28-29.

Bullard, although not a voting FOMC member this year, would clearly hold rates steady. His speech before an audience at Indiana University-Bloomington was entitled "Systemic Risk: An Attempt at Perspective." It concluded with:

In summary, the near-term outlook for economic growth and inflation is above all uncertain. Two keys to future economic performance will be stabilization in housing and financial markets. Financial market turmoil has recently been severe, and the consequences of this turmoil on real economic performance entail clear downside risk. If financial market turmoil can be contained, the FOMC can turn attention to achieving better inflation results than those recently experienced. Until inflation clearly moderates, my colleagues and I will need to be especially watchful that our accommodative policy stance does not begin to worsen the outlook for long-run price stability.

In regards to the $700 billion rescue plan, Bullard said it would help banks "a lot," and that it looked like labor markets were in a recession with recent data that was "weaker than expected."

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