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Search Site Home > Newsroom > St. Louis Fed's Bullard Discusses Current Growth, In ation and Price Level Developments in the U.S. 5/25/2017 TOKYO – Federal Reserve Bank of St. Louis President James Bullard addressed “Current Growth, In ation and Price Level Developments in the U.S.” during a lecture Friday at Keio University in Tokyo. During the lecture, he explained that the U.S. price level has begun to deviate noticeably from the 2 percent path established in the mid-1990s and maintained through 2012. “Standard macroeconomic theory suggests that the signature of optimal monetary policy is maintenance of a price level path,” Bullard said. However, he noted that the gap between the current price level (as measured by the personal consumption expenditures price index) and the previously established 2 percent path has now widened to 4.6 percent. “This is not as severe as the 1990s Japanese experience, but it is worrisome,” he said. Also in his lecture, Bullard discussed how U.S. macroeconomic data since the March 2017 meeting of the Federal Open Market Committee (FOMC) have been relatively weak, on balance. For instance, he noted that U.S. in ation and in ation expectations have surprised to the downside in recent months. He also addressed the nancial market reaction to the FOMC’s March decision to increase the policy rate (i.e., the federal funds rate target). In addition, he examined the relationship between unemployment and in ation and whether the current low unemployment rate may signal a meaningful increase in in ation. For media inquiries contact: Laura Girresch mediainquiries@stls.frb.org O ce: (314) 444-6166 Cell: (314) 348-3639 James Bullard St. Louis Fed President and CEO James Bullard is president and chief executive o cer of the Federal Reserve Bank of St. Louis. In these roles, he participates in the Federal Open Market Committee (FOMC) and directs the activities of the Federal Reserve’s Eighth District. President's Website Speeches & Presentations In explaining these themes, Bullard explored the following topics: Video Appearances Recent Economic Growth in the U.S. Media Interviews He said that real GDP growth, as measured from one year earlier, has averaged just 2.1 percent over the last seven years and that the last two years have shown very little change. “A natural conclusion is that the economy has converged upon a growth rate of about 2 percent,” he said, adding that the U.S. economy is not likely to move meaningfully off of this trend in 2017. He noted that U.S. real GDP grew at an annual rate of 0.7 percent in the rst quarter, according to the current (advance) estimate from the Bureau of Economic Analysis (BEA). (The second estimate will be released by the BEA on May 26 at 8:30 a.m. EDT.) Furthermore, the current estimate for the year-over-year growth rate through the rst quarter is 1.9 percent. Research Papers “Tracking estimates for second-quarter real GDP growth suggest some improvement from the rst quarter, but not enough to move the U.S. economy away from a regime characterized by 2 percent trend growth,” he said. There is also the question of residual seasonality, he said, explaining how rst-quarter real GDP growth in recent years has generally been lower than in other quarters, despite the underlying data being adjusted to remove seasonal effects. He noted that the magnitude of this effect is debatable and that it may be better to use real GDP growth measured from one year earlier to gauge performance. “If residual seasonality is the issue, then second-quarter real GDP growth should be discounted appropriately,” Bullard added. Financial Market Reaction to March Policy Rate Increase He then described how the nancial market reaction to the March policy rate increase has been the opposite of what would typically be expected. He noted that the increase was viewed in nancial markets as suggesting a policy rate increase at the upcoming June FOMC meeting as well. “Ordinarily, when the policy rate is on an increasing path, longer-term interest rates are expected to rise in tandem, both in ation and in ation expectations are expected to remain consistent with the FOMC’s 2 percent in ation target, and nancial market expectations of the policy rate path should remain consistent with the Committee’s projections,” Bullard explained. Instead, since the March decision, “longer-term U.S. yields have declined, U.S. in ation expectations have weakened, and market expectations of the policy rate path have remained below the median path in the FOMC’s Summary of Economic Projections,” he said. “This may suggest that the FOMC’s contemplated policy rate path is overly aggressive relative to actual incoming data on U.S. macroeconomic performance,” he said. Slowing Labor Market Improvement Turning to the U.S. labor market, Bullard explained that labor input growth has slowed over the last two years. For example, nonfarm payroll employment growth measured from one year earlier was 2.3 percent in February 2015 and has slowed to 1.6 percent today. Growth in private hours measured from one year earlier was 3.4 percent in February 2015 and has slowed to 1.7 percent today. “Labor market improvement has been slowing, perhaps close to a trend pace, given the current labor productivity growth regime,” he said. Low Unemployment and In ation With the U.S. unemployment rate at 4.4 percent, Bullard discussed whether that means that in ation is about to increase substantially. Given current estimates of the relationship between unemployment and in ation, he indicated that he doesn’t expect a meaningful increase in in ation. “Low unemployment readings are probably not an indicator of meaningfully higher in ation over the forecast horizon,” he said. “Even if the U.S. unemployment rate declines substantially further, the effects on U.S. in ation are likely to be small.” GENERAL Home About Us Bank Supervision Careers Community Development Economic Education Events Inside the Economy Museum Newsroom On the Economy Blog Open Vault Blog OUR DISTRICT Little Rock Branch Louisville Branch Memphis Branch Agricultural Finance Monitor Housing Market Conditions SELECTED PUBLICATIONS Bridges Economic Synopses Housing Market Perspectives In the Balance Page One Economics The Quarterly Debt Monitor Review Regional Economist ST. 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