Fed official: Economy may be ‘well beyond’ full employment

James Bullard, president of the Federal Reserve Bank of St. Louis, said at a conference in Santa Barbara that the job market is “at or possibly well beyond reasonable conceptions of full employment.”

In Fed speak, “full employment” means that the unemployment rate cannot fall lower without inflation rising.

In his speech, the text of which was released by the regional Fed bank, Bullard sketched out reasons to believe that labor markets are “tight.” Those include that jobless claims have been running at the lowest levels in decades, there are few unemployed workers for every job opening, and job growth has remained strong.

With signs that inflation is heading up to the Fed’s 2 percent target, those data points are reasons for the Fed to start raising interest rates, a step that would be intended to slow the growth of spending and prevent inflation from rising out of control. With higher interest rates, businesses and consumers would be less inclined to borrow money to spend on investments or goods and services.

Yet, Bullard noted, markets currently don’t believe that the Fed will raise rates significantly. Bond market prices suggest that investors only expect one or two rate hikes before the end of next year. Such an outlook could be warranted, Bullard suggested, because of recent weak economic growth and low inflation expectations.

Bullard is a voting member of the Fed’s monetary policy committee. He is known for having a less reserved attitude toward economic surprises than other members of the Fed display, and for being more likely to revise his recommendations in light of significant news.

The Fed’s monetary policy committee is next scheduled to set rates in June. Few investors expect the announcement of a second rate hike to follow the one the committee undertook in December, after keeping rates near zero since 2008.