Federal Reserve policy maker James Bullard warned Thursday that falling oil prices may delay a return of inflation to the central bank’s target.
Pointing to a key challenge for planned interest rate rises this year, Bullard, president of the Fed’s St. Louis branch and a voting member of the Federal Open Market Committee (FOMC) expressed concern about the impact of renewed falls in crude oil prices on inflation as the central bank begins to tighten monetary policy.
“Headline inflation will return to target once oil prices stabilize, but recent further declines in global oil prices are calling into question when such a stabilization may occur,” Bullard said in prepared remarks for a speech at the Economic Club of Memphis.
Bullard, known as an advocate of raising interest rates, acknowledged that he had supported the traditional view in gauging inflation that price changes in oil and other commodities are transitory.
But crude oil prices have collapsed from more than $ 100 in mid-2014 to about $ 30 a barrel this week amid global oversupply and weakening economic growth, driving much of the downward pressure on inflation.
He noted signs of falling inflation expectations that could hinder a return to the Fed’s 2.0 percent inflation target.
“Inflation expectations in the US may be falling. If so, this would put downward pressure on inflation,” he said.
He said the shift in market-based expectations “is becoming worrisome.”
The central bank’s preferred inflation measure rose 0.4 percent in November from a year ago, and core inflation, stripping out energy and food, increased 1.3 percent.
Saying it expected inflation to head toward its target, in December the FOMC decided to raise interest rates for the first time in more than nine years.
It (Other OTC: ITGL – news) lifted the benchmark federal funds rate range to 0.25-0.50 percent from near zero, where it had been pegged for seven years to support the recovery from severe recession.
Bullard’s comments came less than two weeks before the FOMC holds its first meeting of the year. The Fed has signaled it would continue to raise rates in 2016, depending on economic conditions, but the policy makers are not expected to hike at the January 26-27 meeting.
