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Fed's Bullard monitoring market volatility but not committing to rate cut

Federal Reserve Bank of St. Louis President James Bullard told Fox Business on Aug. 15 that despite a stock market selloff this week, U.S. economic fundamentals remain positive.

Bullard, who votes on the Federal Open Market Committee this year, again declined to say whether he would support a rate cut at the next FOMC meeting in September, saying he would not "prejudge" his decision and will continue monitoring incoming data.

But the Fed official downplayed the volatility this week in stock markets, which fell sharply Aug. 14 after yields for 10-year Treasury notes briefly slipped below yields for 2-year Treasury notes. That development, known as a yield curve inversion, has historically preceded U.S. recessions.

The curve inversion would "have to be sustained over a period of time" to send a bearish signal about the economy, Bullard said in the interview, adding that he is going to "have to wait and see on that." The reasons behind the inversion may be tough to disentangle, though they likely include a desire among investors to park their money in safe assets like U.S. Treasurys, which drives down their yields, he said.

Lower yields have a silver lining, since they mean borrowing costs for consumers have fallen, Bullard added.

The news on the yield curve has prompted some investor chatter that the Fed should surprise markets by cutting rates on a non-FOMC meeting day. But Bullard said he did not think that was necessary, saying a couple of weeks' difference on potential Fed actions does not matter much one way or the other.

Bullard said a drop in stocks should not be surprising given that many U.S. companies have an international presence, and greater uncertainty about the global economic outlook may be limiting their profits.

"It's a big selloff, but come on, the market is way up this year," Bullard said.

Stocks were mostly positive Aug. 15 after their steep losses a day earlier. The S&P 500 Index ended the Aug. 15 trading day up 0.25% to 2,847.60, while the Dow Jones Industrial Average rose 0.39% to 25,579.39. The Nasdaq Composite Index was down about 0.09% to 7,766.62.

Walmart Inc. was a major driver of the slight rebound in stocks as the company reported second-quarter earnings that beat expectations and upped its guidance for 2020. The retailer's stock jumped 6.09% to $112.69. In another sign of strong consumer spending, the U.S. Census Bureau reported that U.S. retail sales grew by 0.7% in July, beating the Econoday consensus forecast of 0.3% growth.

Bullard pointed to both of those reports as signs that U.S. consumers remain in solid shape, saying investors should keep in mind that the U.S. labor market remains healthy and that the expected U.S. GDP growth of 2% this year is reasonable.

"We're in the middle of a global slowdown, and we're just going to have to assess how this is going to affect the U.S. economy," he said.