Fed’s Bullard Warns About Market Mismatch with US Monetary Policy

Global markets are facing a “mismatch” with the future of U.S. monetary policy and have the potential for major volatility, St. Louis Federal Reserve President James Bullard said Monday.

In May 2013, the Fed’s policy minutes sparked fears that the central bank could start tapering its $85 billion-a-month bond purchasing program.

The subsequent market reaction became known as the “taper tantrum,” with emerging market currencies tumbling as investors started to bring their dollars back to the U.S. in anticipation of higher interest rates. Yields on 10-year benchmark U.S. Treasurys rose above 2 percent and stock markets reeled as volatility spiked.

In an interview on CNBC, Bullard said this could happen again, with the central bank now looking to raise its main benchmark interest rate this year.

“We do have some potential for that today because the Fed funds futures path, the market based one, is a lot lower and shallower than the Fed’s actual (summary of economic projections),” he said.

“So there is a mismatch there, that is going to have to be reconciled at some point.”

He added that the Fed’s statement last week, which took an unexpectedly dovish tone, could have further misplaced market expectations about the first rate hike.

via CNBC

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza