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Fed’s Bullard: A Sharp Drop in Unemployement Will Bolster Inflation

“Federal Reserve Bank of St. Louis PresidentJames Bullard said a rapid drop in joblessness will fuel inflation, bolstering his case for an interest-rate increase early next year.

“I think we are going to overshoot here on inflation,” Bullard said yesterday in a telephone interview from St. Louis. He predicted inflation of 2.4 percent at the end of 2015, “well above” the Fed’s 2 percent target.

“That is a break from where most of the committee seems to be, which is a very slow convergence of inflation to target,” he said in a reference to the policy-making Federal Open Market Committee.

A drop in unemployment to 6.1 percent in June, the lowest level in almost six years, increases pressure on the Fed to raise the main interest rate sooner than most officials have estimated, Bullard said.

The St. Louis Fed chief, who calls himself the “North Pole of inflation hawks,” estimates full employment at about 6 percent. A lower level may stoke wage and price pressures, he said. The FOMC’s longer-run projection of unemployment is between 5 percent and 6 percent.

“When unemployment goes into the five range, that is going to below the natural rate,” or the level at which inflation is neither speeding up or slowing down, Bullard said.

Photographer: Scott Eells/Bloomberg

James Bullard, president of the St. Louis Federal Reserve Bank.

“Inflation has been unusually low in 2013 and the first part of 2014” because of temporary circumstances such as European economic weakness.

“Those special factors are wearing off, and the economy is on the upswing,” Bullard said. “Those factors will send the inflation rate above target in 2015.”

Rapid Drop

Unemployment could drop below 6 percent in “the next couple of jobs reports,” Bullard said…..”

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