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Home > Newsroom St. Louis Fed's Bullard Offers Perspectives on 2019 Monetary Policy January 10, 2019 Little Rock, Ark. – Federal Reserve Bank of St. Louis President James Bullard offered “Perspectives on 2019 Monetary Policy” at the Little Rock Regional Chamber’s Power Up Little Rock event on Thursday. In his talk, Bullard pointed out that U.S. macroeconomic performance surprised to the upside during 2017 and 2018 but in�ation remains subdued. “U.S. monetary policymakers reacted to the upside surprise in macroeconomic performance during 2017 and 2018 by taking the opportunity to normalize U.S. short-term interest rates,” he said. However, market-based signals such as low market-based in�ation expectations and a threatening yield curve inversion suggest that this window of opportunity has now closed, he noted. The Federal Open Market Committee (FOMC) “should heed these important signals in order to keep the U.S. expansion on track for the next several years,” Bullard said. “The FOMC has already been suf�ciently pre-emptive over the last two years to contain upside in�ation risk,” he added. In�ation Has Been Subdued Despite Upside Macroeconomic Surprise Bullard pointed out that, in March 2017, the median FOMC projection was for stable and subdued economic growth in 2017, 2018 and 2019. “Actual real GDP growth has been stronger than expected, actual unemployment has trended lower than expected, and actual in�ation has been somewhat lower than expected,” he said. Because the real economy performed better than expected in 2017 and 2018, many anticipated higher in�ation, Bullard explained. “However, actual in�ation readings have remained subdued,” he said. He added that core personal consumption expenditures (PCE) in�ation, a commonly used benchmark measure, has been lower than expected during the last two years. “This is further con�rmation that older Phillips curve correlations—linking low unemployment to high in�ation—have broken down and cannot be relied upon to provide a guidepost for today’s policymakers,” he said.1 In�ation Expectations Remain Subdued Bullard pointed out that the FOMC has missed its PCE in�ation target on an annual basis every year since 2012. “Market-based measures of in�ation expectations suggest that �nancial markets believe the FOMC will again miss its PCE in�ation target to the low side in 2019 and, indeed, for the next �ve years,” he said. These expectations take into account all available information affecting the likely evolution of in�ation going forward, Bullard pointed out. “This is a market signal that the current stance of monetary policy may be too hawkish,” he said. Risks of Further Slowdown in Global Growth Turning to forecasts from the International Monetary Fund, Bullard explained that global growth was modestly slower than expected last year. “During 2018, the IMF reduced its growth forecasts for much of the world outside the U.S., most signi�cantly in Europe,” he said. The IMF did not lower its forecast for China, he explained, but other data suggest the Chinese economy is also slowing. “Financial markets are concerned that the modest slowdown may turn into a more signi�cant slowdown during 2019,” he added. Some of the data from China, such as slower industrial production growth, retail sales growth and �xed assets investment, may be feeding into this view, Bullard explained. “In addition, global oil prices have fallen signi�cantly in recent months, which is sometimes interpreted, in part, as a falloff in global demand,” he said. Yield Curve Inversion Threatening Bullard then discussed the yield curve, which has been �attening. “A signi�cant and sustained inversion of the Treasury yield curve would be a bearish signal for the U.S. economy,” he said. An inversion would suggest that �nancial markets expect less in�ation and less growth ahead for the U.S. economy than does the FOMC, which in�uences the short end of the curve, Bullard explained. “Inversions have been associated with recessions in the postwar U.S. data,” he said. “The FOMC should moderate its normalization campaign given that the yield curve is getting close to inversion.” 1 For additional information, see J. Bullard, “The Case of the Disappearing Phillips Curve,” remarks delivered at the 2018 ECB Forum on Central Banking Macroeconomics of Priceand Wage-Setting, Sintra, Portugal, June 19, 2018.