Tight labor market pressures inflation

May 23, 2016 09:11 AM

A relatively tight labor market in the United States may put upward pressure on inflation, raising the case for higher interest rates, St. Louis Federal Reserve President James Bullard said on Monday.

The comments come as financial markets have increased expectations for a U.S. interest rate hike in June or July and a range of policymakers are now stating that a rise is firmly on the table for the next policy meeting in June.

"Labor markets are relatively tight. This may put upward pressure on inflation going forward," Bullard, a voting member of the Fed's policy-setting committee, said in Beijing.

"This is an important factor supporting the FOMC view on the expected path of the policy rate," he said.

Bullard said the Federal Open Market Committee has laid out a data-dependent "slow normalization" of rates, thereby the nominal policy rate would gradually rise over the next several years provided the economy evolves as expected.

The remarks were prepared for delivery at a meeting of the Official Monetary and Financial Institutions Forum, which focuses on monetary policy and investment.

Expectations for a June rate hike rose last week following minutes from the central bank's April policy meeting released on May 18 that showed Fed officials felt the U.S. economy could be ready for another interest rate increase.

Bullard said the U.S. labor market was performing well and global headwinds that had partly prevented the Federal Reserve from raising rates again may have waned.

"U.S. labor market performance has been very good. By nearly any metric, U.S. labor markets are at or beyond full employment," he said.

In deciding whether to raise rates, the Fed looks for improvement in the economy, further strengthening of the jobs market and evidence that inflation is moving toward its 2% target.

U.S. economic growth during the first quarter slowed to an annual rate of 0.5%, a two-year low, but ongoing robust job growth suggested the economy had not gone off the track.

The jobless rate, now at 5%, is near what most economists consider full employment.

Recent data including retail sales, housing starts and industrial production painted an upbeat picture at the start of the second quarter.

However, some Fed officials have expressed concern in recent weeks and months that the economy is stuck in a state where even historically low rates of growth can fuel inflation.

The Fed last month kept its target overnight interest rate in a range of 0.25% to 0.50%.

Some policymakers at the April meeting said they were concerned financial markets could be roiled by a possible British exit from the European Union in a vote next month or by China's exchange rate policies.

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