St. Louis Fed President James Bullard has praised the idea of an “insurance” rate cut from the Federal Reserve.
“You take out the insurance, if nothing happens you take it back,” Bullard said on Friday from the Fed’s economic policy symposium in Jackson Hole, Wyoming.
“It’s always the case with insurance that you can say:
‘Well, you made these cuts and it turned out the economy continued to grow.’ That’s OK, you can just come back and take the cuts back,” he added.
Insurance cuts were used in 1995 and 1998 by the Alan Greenspan-led Fed to fight an economic slowdown and successfully extend the expansion that would up being the second longest in United States history.
The central bank reduced interest rates on three occasion, a total of 75 basis points, during both periods against risks originating from Mexican and Russian defaults and the crumble of hedge fund Long-Term Capital Management.
“I think that’s a good model or baseline case for what could happen here,” said Bullard.
A worldwide manufacturing decline and a U.S.- China trade war are affecting global growth, according to Bullard.
“There’s some downside risk, and I think you’d like to take out some insurance against that downside risk and I’d like to take out more insurance,” said Bullard.
“We can take the insurance back next year if it turns out that this is all going to blow over.”
Bullard, who is a voting member of the Federal Open Market Committee this year, also added that Fed shout slash rates since inverted yield curve is “not a good place to be.”
The bond market’s primary yield curve inverted briefly for the third time in just under two weeks on Thursday 22.