Bullard: A Year in Review

The text below first appeared as the President’s Message in the fourth quarter 2018 issue of Regional Economist.

St. Louis Fed President James Bullard has been a participant in Federal Open Market Committee (FOMC) deliberations since April 2008. Bullard actively engages with many audiences—including academics, policymakers, business and community organizations, and the media—to discuss monetary policy and the U.S. economy and to help further the regional Reserve bank’s role of being the voice of Main Street.

Some of his key policy presentations during 2018 are summarized below, in chronological order. To see all of Bullard’s public presentations, please visit www.stlouisfed.org/from-the-president.

R-Star Wars: The Phantom Menace

Feb. 26, 2018: In Washington, D.C., Bullard discussed the natural real rate of interest (commonly called r*, or r-star) and its implications for the Fed’s key policy rate (the federal funds target rate). He considered three factors that can influence the natural real rate of interest and noted that the U.S. is currently in a regime (or state) of low productivity growth, appears to be in a low-growth state for the U.S. labor force, and is in a regime of a high desire for safe assets (the most important of the three factors). He concluded that the natural safe real rate of interest, and hence the appropriate policy rate, is relatively low and unlikely to change very much over the forecast horizon.

U.S. Monetary Policy: A Case for Caution

May 11, 2018: Speaking in Springfield, Mo., Bullard outlined five reasons for caution in raising the policy rate further based on current macroeconomic conditions. Those reasons are: 1) market-based inflation expectations remain low; 2) the current policy rate setting is neutral (putting neither upward nor downward pressure on inflation); 3) the yield curve is relatively flat and yield curve inversion (whereby short-term interest rates exceed long-term interest rates) is possible; 4) business investment has room to grow; and 5) labor markets are in equilibrium.

The Case of the Disappearing Phillips Curve

June 19, 2018: Bullard discussed the “flattening Phillips curve” in advanced economies during a panel at the ECB (European Central Bank) Forum on Central Banking in Sintra, Portugal. The Phillips curve refers to the empirical relationship between inflation and unemployment, which used to be negative but has been drifting toward zero since the inflation targeting era began in the 1990s. He attributed the flatter empirical Phillips curve to improved monetary policy during this era, noting that inflation has generally been lower, less volatile and closer to stated inflation targets. “Today’s G-7 monetary policymakers are unlikely to glean a reliable signal for monetary policy based on empirical Phillips curve slope estimates—they have to look elsewhere,” he said.

Assessing the Risk of Yield Curve Inversion: An Update

July 20, 2018: In Glasgow, Ky., Bullard talked about the possibility that the yield curve would invert, which he first discussed in a presentation on Dec. 1, 2017. He commented that there is a material risk of yield curve inversion over the forecast horizon if the FOMC continues on its present course for raising the policy rate, as suggested by the FOMC’s June 2018 projections. Such an inversion is a “naturally bearish signal for the economy,” he said. He noted that inversion is best avoided in the near term by caution in raising the policy rate. “Given tame U.S. inflation expectations, it is unnecessary to push monetary policy normalization to such an extent that the yield curve inverts,” he said.

How to Extend the U.S. Expansion: A Suggestion

Sept. 5, 2018: In New York, Bullard laid out a possible strategy for extending the U.S. economic expansion. The strategy relies on placing more weight on financial market signals, such as the slope of the yield curve and market-based inflation expectations, than is customary. He noted that many current approaches to monetary policy strategy continue to overemphasize the now-defunct empirics of the Phillips curve. “Handled properly, current financial market information can provide the basis for a better forward-looking monetary policy strategy,” he said. He also noted that these signals could help the FOMC better identify the neutral policy rate. “The flattening yield curve and subdued market-based inflation expectations suggest that the current monetary policy stance is already neutral or possibly somewhat restrictive,” he said.

Some Consequences of the U.S. Growth Surprise

Oct. 8, 2018: In Singapore, Bullard discussed the surprisingly strong performance of the U.S. economy relative to projections made by the FOMC in the first half of 2017. A key consequence of this growth surprise, Bullard said, is that it has allowed the FOMC to normalize its policy rate along a projected path, with attendant consequences for global financial markets. He added that a continuation of the growth surprise likely requires faster U.S. productivity growth.

Modernizing Monetary Policy Rules

Oct. 18, 2018: In Memphis, Tenn., Bullard discussed modernizing a popular monetary policy rule, a version of the Taylor rule, whose construction was based on U.S. data from the 1980s and 1990s. Since then, he noted, three important macroeconomic developments have altered key elements of policy rule construction: lower short-term real interest rates, the disappearing Phillips curve and better measures of inflation expectations. “Incorporating these developments yields a modernized policy rule that suggests the current level of the policy rate is about right over the forecast horizon,” Bullard said.