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Search Site Home > Newsroom > St. Louis Fed's Bullard Discusses Recent Developments in Monetary Policy 7/12/2013 JACKSON HOLE, Wyo. – Federal Reserve Bank of St. Louis President James Bullard gave remarks Friday on “Recent Developments in Monetary Policy,” as part of the Federal Reserve Bank panel at the Global Interdependence Center’s 5th Annual Rocky Mountain Economic Summit. During his presentation, Bullard discussed the substantial rise in Treasury yields following Federal Open Market Committee policy communications in June. He addressed several possible reasons for the increase, concluding “a key justi cation is that there is currently more optimism about future economic performance” than before. However, he noted that optimistic forecasts have consistently been wrong during the past several years. “Given recent forecasting records, we may want to reserve judgment on this until better data arrive,” Bullard said. Developments in Monetary Policy Current U.S. monetary policy has three components: the policy rate, forward guidance and asset purchases, he said. The policy rate has been near zero since December 2008. Forward guidance is a promise to keep that rate near zero at least until unemployment falls below 6.5 percent or in ation rises above 2.5 percent. Asset purchases of Treasury securities and mortgage-backed securities are continuing at $85 billion per month until there is substantial improvement in the labor market, as stated by the FOMC. Bullard noted that the FOMC recently authorized Fed Chairman Ben Bernanke to discuss possible plans for the “tapering of QE,” which refers to reducing the pace of asset purchases. “The nancial market reaction has been substantial, even though the Committee has not actually changed any policy settings at this point,” Bullard said. For instance, he cited recent increases in the nominal and real yields on 10-year Treasury notes, along with increases in the expected path for the federal funds rate (as estimated from nancial futures) and in nancial stress (as measured by the St. Louis Fed Financial Stress Index.) Regarding global developments in monetary policy, Bullard noted that the European Central Bank recently decided to go ahead with a forward guidance initiative. “This may provide more support for the Euro-area economy and ultimately for the U.S., and so may be a bullish factor for the U.S.,” he said. (For more on this topic, see Bullard’s presentation, “Monetary Policy in a Low Policy Rate Environment,” given at Goethe University Frankfurt’s Institute for Monetary and Financial Stability Distinguished Lecture, May 21, 2013.) Possible Justi cations for the Rise in U.S. Treasury Yields Bullard examined three possible justi cations for the bond market reaction since the June FOMC meeting: 1) A substantial improvement in the economy, 2) an increase in in ation expectations, and 3) optimism due to improved prospects for the U.S. economy. While bond yields would naturally rise if macroeconomic performance was stronger than expected, Bullard said that “the evidence on current economic performance is mixed.” For instance, while some measures of labor market outcomes have improved since QE3 was launched in September, others (e.g., hours worked and the labor force participation rate) have not. Bullard also noted that real GDP growth has been slow in recent quarters. Therefore, he concluded, the rise in yields probably cannot be justi ed by better data on the U.S. economy. Turning to in ation, Bullard said nominal bond yields could rise in reaction to higher expected in ation, which would be a traditional reason to tighten monetary policy. “However, current in ation is low and the immediate reaction to the FOMC announcement was to send TIPS-based in ation expectations lower,” he said. Accordingly, he explained, the increase in bond yields is not associated with an increase in in ation expectations. Bullard then addressed the optimistic view of the U.S. economy, explaining that many, but not all, of the factors slowing down the U.S. economy are waning. “Real estate markets are improving, equity markets have rallied, the European sovereign debt crisis remains subdued for now, U.S. scal brinksmanship has been less of a problem and household deleveraging is further along,” he said. However, Bullard expressed caution against relying too much on optimistic forecasts at a time when additional macroeconomic data is needed. “Recent FOMC decisions have met with a substantial rise in Treasury yields, and I have suggested that a possible justi cation for the rise in yields is increased optimism concerning future U.S. macroeconomic performance,” Bullard concluded. “However, given recent forecasting performance, we should be careful in using an optimistic forecast to justify current policy decisions. A more prudent approach would be to wait to see if better macroeconomic outcomes materialize in the months and quarters ahead.” 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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