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Search Site Home > Newsroom > St. Louis Fed's Bullard Discusses Stance of Monetary Policy, Economy Relative to Pre-Crisis Levels 6/9/2014 PALM BEACH, Fla. – Federal Reserve Bank of St. Louis President James Bullard discussed “How Far Is the FOMC from Its Goals?” at the Tennessee Bankers Association’s annual meeting on Monday. Bullard noted that improving economic conditions have resulted in the Federal Open Market Committee (FOMC) now being much closer to its macroeconomic goals than it has been in the past ve years. In particular, unemployment has continued to trend lower and in ation is low but moving back toward the FOMC’s 2 percent target. While the FOMC is closer to its macroeconomic goals, Bullard noted that the stance of monetary policy remains far from its pre-crisis settings. “The monetary policy stance remains far from normal, despite recent reductions in the pace of asset purchases.” He explained that concerns remain about the overall performance of the labor market and, until recently, in ation was unexpectedly low. “The Committee now faces a classic challenge concerning the appropriate pace of monetary policy normalization,” Bullard said. Much Closer to Macroeconomic Goals Over the past ve years, U.S. unemployment has been high and in ation has remained relatively low. The FOMC was a long way from its macroeconomic goals, Bullard said, adding that this situation has led to an extraordinary monetary policy response. “But today, the FOMC is much closer to its macroeconomic goals.” To measure the distance of the economy from the FOMC’s goals, Bullard used a simple function that depends on the distance of in ation from the FOMC’s long-run target and on the distance of the unemployment rate from its long-run average. This version puts equal weight on in ation and unemployment and is sometimes used to evaluate various policy options, Bullard noted. In his calculations, the target rate of in ation was set at 2 percent, the FOMC’s in ation target. The long-run average rate of unemployment was set at 5.4 percent, the midpoint of the central tendency of the FOMC’s Summary of Economic Projections. Bullard examined how often the FOMC has been as far from its objectives as it is today. The function value is closer to the FOMC’s goals than it has been about 75 percent of the time since 1960, he said. “That is, if we do this calculation for every month of data since 1960, 75 percent of the time the FOMC was in a worse position with respect to its goals than it is today,” Bullard explained. Thus, “the FOMC is closer to target today than it has been most of the time since 1960,” he said, adding that the function value is currently below the average over this period. Bullard then looked at a more recent time frame. Considering data only since 2006, the function value is close to pre-crisis levels. “In this sense, the macroeconomy is much closer to normal than it has been during the past ve years,” Bullard said. “The monetary policy stance, on the other hand, is not close to pre-crisis levels.” Monetary Policy Stance In response to the nancial crisis, the FOMC lowered the policy rate to zero and implemented outright asset purchases. While the FOMC recently began tapering the pace of asset purchases, Bullard noted that the two main policy actions have not been reversed so far. That is, the Fed balance sheet is still large and increasing, and the policy rate remains at the zero lower bound. Bullard said there are two likely reasons why monetary policy is so far from normal even though the FOMC is relatively close to its objectives: Labor markets do not seem to be fully recovered, and in ation has been low. However, he noted that while in ation is low, it is moving back toward the FOMC’s target. “With in ation still below target, albeit rising, and unemployment still high, but falling, the Committee faces a classic monetary policy challenge,” Bullard said. He added that the challenge is how quickly the FOMC should move to return monetary policy to normal given improving macroeconomic conditions. “The debate on this topic is likely to garner signi cant attention as the economy continues to improve during 2014,” he concluded. 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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