Major Story: Fed’s Bullard Admits Fed Misread Economy, Warns About Hiking Too Much

This will get lost in the sauce today, ahead of Sally “the hero” Yates’ testimony. But Fed’s Bullard admitted that he and his pals misread the economy and that hiking rates like a crazed lunatic, with GDP growing sub 1%, might not be a great idea.

“The first-quarter GDP growth was disappointing and it means we are starting the year in an inauspicious way…It was consumption growth that was weaker and that is a concern because consumption has been a strong point,” said Bullard, who feels in the current low-growth economic climate the Fed may need at most one more rate increase.

“On inflation the numbers were disappointing. We have been telling a story that we are trending back towards 2 percent and we went the other way,” away from the Fed’s formal target.

“I worry we get back into calendar-based policy…and not paying attention to what is happening in the data,” said Bullard.

Bullard has argued since last year that in a low-growth, low-productivity, low-inflation “regime,” the appropriate federal funds rate is less than one percent – about where it is now following the Fed’s most recent rate hike in March.

He said there is no reason to expect any of those dynamics to change soon, and no reason for the Fed to march rates steadily higher.

“The natural rate of interest, and hence the appropriate policy rate, is low and unlikely to change very much,” said Bullard. “The policy rate is approximately at an appropriate setting today.”

This is extremely bullish for stocks — because an accommodative and easy Fed is boolish for equities. My fear was for the Fed to hike and reduce the balance sheet, without realizing how shitty the economy was. Granted, earnings have been solid and unemployment is pretty damned good. But GDP growth is sucking wind and the distribution of wealth has never been more perverse. As such, Fed’s Bullard took a  major step here in acknowledging the possibility that hiking rates into a suboptimal economic backdrop might not be a great idea.

Should the Fed ease up on hikes, banks will do poorly, but basic resources, gold and everything else should rip higher. Bonds should do well too.