The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
Search Site Home > Newsroom > St. Louis Fed's Bullard Discusses Whether Low In ation Justi es a Zero Policy Rate 11/14/2014 ST. LOUIS – Federal Reserve Bank of St. Louis President James Bullard addressed “Does Low In ation Justify a Zero Policy Rate?” at a nancial forum hosted by the St. Louis Regional Chamber on Friday. During his presentation, Bullard noted that the policy rate has remained near zero for almost six years and discussed whether current macroeconomic data can rationalize this exceptionally low setting for the policy rate. “Labor markets have shown steady improvement this year,” he said, adding, “Lower longer-term interest rates and lower oil prices in recent months should provide additional tailwinds for U.S. macroeconomic performance.” In ation, however, is currently running below the Federal Open Market Committee’s (FOMC’s) target rate of 2 percent. In addition, he cited market-based measures of in ation expectations, which declined in recent months but have reversed course. “Global factors, including low in ation in Europe and lower oil prices, may be temporarily holding in ation down in the U.S.,” he said, adding that in ation is generally projected to rise toward the FOMC’s target. “The FOMC has indicated that the policy rate is likely to rise next year, with the exact timing dependent on macroeconomic data in coming quarters,” Bullard noted. “Analysts sometimes cite the current low level of in ation as a reason why the FOMC may wish to remain at the zero lower bound for even longer. However, while a low in ation rate may suggest a somewhat lower-than-normal policy rate, that effect is not large enough to justify remaining at the zero lower bound.” Improving Labor Markets The unemployment rate in the U.S. has fallen much faster than the FOMC expected, and the fall has recently accelerated, Bullard noted. “As of March 2013, the Committee’s Summary of Economic Projections (SEP) suggested that the unemployment rate in December 2014 would be just below 7 percent,” he said. “The actual unemployment rate today is 5.8 percent, about a full percentage point ahead of schedule.” He added that the unemployment rate has entered into the range of longer-run or normal values suggested by the SEP ranges. Along with the decline in the unemployment rate, nonfarm payroll employment has increased faster than anticipated, he said, noting that roughly 1 million more jobs have been added relative to private sector forecasts as of September 2012, when the QE3 program was launched. He also discussed broader measures of labor market performance, including the labor market conditions index developed by Federal Reserve Board staff to account for the signal that several indicators are sending jointly. “The level of this index has risen above its long-run average value. This suggests that accounting for a variety of labor market indicators, labor market performance today is above average,” Bullard explained. “In summary, labor markets continue to improve and are approaching or even exceeding normal performance levels,” Bullard said, adding that normal labor markets have not been associated historically with a policy rate near zero. “This suggests that over the next year, it will become more and more di cult to point to labor market performance as a rationale for a near-zero policy rate.” In ation and Financial Markets Bullard noted that with improving labor markets, justi cations for the current near-zero policy rate have shifted to the fact that in ation is below the FOMC’s target. While in ation was above the target as of January 2012, it has been running below target in 2013 and 2014. He also pointed out that market-based measures of in ation expectations have declined to low levels in recent months but have rebounded since mid-October. “Most likely, these expectations will rise back toward the FOMC’s in ation target in coming months and quarters,” Bullard said. “However, this bears careful watching. In ation and in ation expectations moving away from target is a concern.” Regarding the recent volatility in nancial markets, Bullard said that during the late summer and continuing into October, global nancial markets began to price in the possibility of a global recession. This was based largely on news of a weaker-thanexpected European economy. “My own view has been that such fears were overstated, in part because U.S. macroeconomic fundamentals seem strong,” he said, adding that if such a scenario did develop, the Fed would most certainly respond. “Since mid-October, this issue has faded as U.S. economic data has indicated continuing growth,” he added. The Policy Rate Path Turning to policy rate expectations, Bullard said that markets currently expect the policy rate to cross 50 basis points in the fourth quarter of 2015, somewhat later than the most current SEP projections indicate. “One might be tempted to argue that in ation is low, so why not wait on liftoff?” Bullard said. “However, low in ation does not rationalize the zero rate policy according to simple Taylor rule calculations.” In a Taylor-type rule, the short-term nominal interest rate should respond to deviations of in ation from target and of actual output from potential output, Bullard explained. He examined the prescriptions from three such policy rules—the Taylor (1993) rule, the Taylor (1999) rule and the Taylor (1999) rule with interest rate smoothing. All three of these rules suggest that liftoff should already have occurred, at the latest in June 2014. “The Committee has not moved off of the zero interest rate policy so far, and in this sense the Committee is already exhibiting considerable patience,” Bullard noted. “One possible rationale for deviating from these rules is that residual risk of declining in ation and in ation expectations exists,” he said, adding that the recent data from Europe are suggestive in this regard. “Patience may allow the Committee to make sure such a risk does not materialize.” 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. LOUIS FED PRESIDENT James Bullard's Website INITIATIVES Center for Household Financial Stability Dialogue with the Fed Federal Banking Regulations FOMC Speak In Plain English - Making Sense of the Federal Reserve Timely Topics Podcasts and Videos DATA AND INFORMATION SERVICES CASSIDI® FRASER® FRED® FRED® Blog GeoFRED® IDEAS FOLLOW THE FED Twitter Facebook YouTube Google Plus Email Subscriptions RSS CONTACT US | LEGAL INFORMATION | PRIVACY NOTICE & POLICY | FEDERAL RESERVE SYSTEM ONLINE