Fed officials downplay Brexit’s impact on U.S.

Christopher Condon and Michael Heath
Bloomberg News

Federal Reserve Bank of St. Louis President James Bullard said he thought the U.K.’s vote to leave the European Union wouldn’t have a lasting effect on the U.S. economy, joining Cleveland Fed chief Loretta Mester in playing down the threat Brexit poses to the U.S.

“Now that the markets have had some chance to digest the move, I think the ultimate impact on the U.S. economy will be close to zero,” Bullard told reporters Tuesday following a speech in St. Louis.

Mester, who like Bullard is a voter this year on the policy-setting Federal Open Market Committee, earlier told reporters in Sydney that due to the relatively closed nature of the U.S. in terms of its reliance on exports “I don’t expect it to be a big effect on our economy.” Officials will keep Brexit in sight as they weigh the U.S. outlook, she said.

Fed officials are expected to review the implications of the U.K. decision when they next meet on July 26-27, together with data that showed a sharp rebound in U.S. payrolls last month after a disappointing performance in May.

Investors see only a 4 percent probability of a rate increase in July, according to pricing in federal funds futures contracts. Odds of a move by December are back to 34 percent after falling to around 8 percent after of the U.K.’s June 23 referendum.

Bullard said the “shock” of the Brexit vote explains why yields on U.S. Treasuries had fallen to historic lows in the aftermath.

“Wall Street has taken that as a signal that growth is slowing” in the U.S., he said. “I think it’s a flight to safety. I would not take it as a signal of U.S. growth prospects.”

In his speech, Bullard repeated the argument he unveiled June 17 that the U.S. is stuck in a low-growth environment for the next two to three years and that Fed officials should keep the federal funds rate almost unchanged for that period.

Fed officials held their target range for the benchmark federal funds rate at 0.25 percent to 0.5 percent at their June 14-15 meeting to wait for more information on the health of the U.S. labor market and to assess the fallout from the British vote.

Answering reporters’ questions, Bullard said the robust June employment report of 287,000 workers added to payrolls showed that May’s poor performance of only 11,000 new jobs had been “an anomaly.” The three-month average for employment growth signals the trend is slowing as expected, he said.

“I would expect continued slowing in the pace of job growth,” he said. “We can’t add 200,000 jobs a month anymore.”

However, the St. Louis Fed chief doesn’t expect a tightening labor market to trigger significantly higher inflation because GDP growth will likely remain too weak, at around 2 percent.

“If there was rapid job growth that seemed to be associated with very high economic growth, in that situation we might have to adjust a little bit,” he said.

Asked if there was a greater role for fiscal policy to play in boosting the longer-term U.S. outlook, Bullard said the nation is only likely to achieve faster growth if other parts of the government respond with policies that address tepid productivity growth and demographic trends.

“We badly need a growth agenda,” Bullard said, adding that the central bank had repeatedly made this argument. “We’re talking, but I think it’s falling on deaf ears.”