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Home > Newsroom St. Louis Fed's Bullard Discusses Three Themes for Monetary Policy in 2019 February 07, 2019 St. Cloud, Minn. – Federal Reserve Bank of St. Louis President James Bullard discussed “Three Themes for Monetary Policy in 2019” at St. Cloud State University’s 57th Winter Institute on Thursday. The �rst theme was related to low market-based in�ation expectations. Bullard noted that the Federal Open Market Committee (FOMC) may miss its 2 percent in�ation target on the low side for the eighth consecutive year in 2019 based on current readings of market-based in�ation expectations. The second theme was related to the very weak feedback from labor markets to in�ation. “Labor markets have been performing well, but the feedback from labor markets to in�ation has weakened considerably in the last two decades,” he said. The third theme was related to the �attened yield curve. “The Treasury yield curve has �attened signi�cantly, and a meaningful and sustained yield curve inversion would send a bearish signal for the U.S. economy,” he said. Market-Based In�ation Expectations Are Low Bullard pointed out that the FOMC has missed its personal consumption expenditures (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. He noted that market-based measures of in�ation expectations provide an important benchmark for current monetary policy. These expectations take into account all available information affecting the likely evolution of in�ation going forward, he explained. Feedback from Labor Markets to In�ation Is Weak Bullard noted that U.S. monetary policymakers and �nancial market participants have long relied on the Phillips curve—the correlation between labor market outcomes and in�ation— to guide monetary policy. “However, these correlations have broken down during the last two decades, so they no longer provide a reliable signal,” he said. “Policymakers have to look elsewhere to discern the most likely direction for in�ation.” Yield Curve Inversion Threatening Bullard then discussed the yield curve, which has �attened signi�cantly. He noted that various measures of yield spreads are all trending toward inversion. 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, he explained. He added that inversions have been associated with recessions in the postwar U.S. data. Conclusion “Market-based signals such as low market-based in�ation expectations and a threatening yield curve inversion suggest that the FOMC needs to tread carefully going forward,” Bullard said. “Through its normalization program, the FOMC has already been suf�ciently preemptive over the last two years to contain upside in�ation risk.”