St. Louis Fed's Bullard: Three Questions for U.S. Monetary Policy

KIRKSVILLE, Mo. – Federal Reserve Bank of St. Louis President James Bullard gave remarks on “Three Questions for U.S. Monetary Policy” at Truman State University on Wednesday.

In his talk, he discussed the current slow-growth regime in the U.S. He also discussed inflation, which he said “has surprised to the downside this year.” In addition, he looked at U.S. labor market performance, which has been good.

He explained that this macroeconomic situation suggests the current level of the policy rate (i.e., the federal funds rate target) “is likely to remain appropriate over the near term.”

In this context, Bullard posed these three questions:

• Is U.S. economic growth poised for a rebound in the second half of 2017, as compared to the first half?
• Is the downside inflation surprise in the first half of 2017 likely to reverse in the second half of 2017?
• Will continued strong performance of U.S. labor markets put upward pressure on inflation?

His response to all three: “Probably not.”

Will real GDP growth be higher in the second half of 2017?

In looking at U.S. economic growth, Bullard said data since the financial crisis suggest that the U.S. has converged to real GDP growth of 2 percent.

“Second-quarter real GDP growth showed some improvement from the first quarter, but not enough to move the U.S. economy away from a regime characterized by 2 percent trend growth,” he said. Real GDP grew at an annual rate of 2.1 percent in the first half of 2017. “The 2 percent growth regime appears to remain intact,” he added.

Bullard noted that there was some hope during the summer that the second half of 2017 would see faster growth, perhaps at a 3 percent pace. However, he explained, two developments have dampened those hopes. First, some macroeconomic data came in weaker than anticipated. Second, major hurricanes caused substantial damage in some parts of the country.

Although the economy should rebound somewhat in the fourth quarter as hurricane damage is repaired, Bullard noted, it probably won’t be significant enough to move second-half real GDP growth meaningfully above 2 percent. 

Will the low-inflation trend reverse itself?

Turning to inflation, Bullard noted that the U.S. inflation rate has been below the Federal Open Market Committee’s 2 percent inflation target since 2012.

“Inflation data during 2017 have surprised to the downside and call into question the idea that U.S. inflation is reliably returning toward target,” he said, adding that the current low-inflation trend will probably not reverse this year.

Are U.S. labor markets signaling a meaningful rise in inflation?

Bullard noted that the unemployment rate is relatively low, and the pace of employment growth has met or exceeded expectations in recent months. He explained that these are sometimes cited as factors that will eventually drive the inflation rate higher.

He discussed the question of whether the low U.S. unemployment rate—at 4.4 percent in the August reading—might signal a substantial rise in inflation. “The short answer is no, based on current estimates of the relationship between unemployment and inflation,” he said. “Even if the U.S. unemployment rate declines substantially further, the effects on U.S. inflation are likely to be small.”

In returning to his three initial questions on real GDP growth, inflation and labor market performance, Bullard summarized his points.

“Recent data indicate that U.S. real GDP growth remains consistent with the low-growth regime of recent years,” he said, although he noted that hurricane effects will add uncertainty to the interpretation of macroeconomic data in the months ahead. On inflation, he said, “U.S. inflation has surprised to the downside in recent months, and the surprise is unlikely to reverse during 2017.” In addition, he noted that “low unemployment readings are probably not an indicator of meaningfully higher inflation over the forecast horizon.”

Given these factors, Bullard concluded, “The current level of the policy rate is appropriate given current macroeconomic data.”