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Fed's Bullard: The policy rate is approximately at an appropriate setting today
Federal Reserve Bank of St. Louis President James Bullard discussed reasons for the downward trend in the natural real rate of interest during a presentation Monday at the Federal Reserve Bank of Atlanta’s 22nd Annual Financial Markets Conference.
Key quotes:
- r† is often referred to as “the natural real rate of interest”
- Three factors that can influence the natural rate: 1) the labor productivity growth rate, 2) the labor force growth rate, and 3) an investor desire for safe assets
- U.S. labor productivity appears to be in the low-growth regime
- On labor force growth: It looks like the U.S. is in a low-growth state, but a case could be made that some recent observations have been more consistent with the high-growth state
- U.S. is currently in a regime with a high desire for safe assets as opposed to a regime with a more normal desire
- With the U.S. unemployment gap and inflation gap near zero, a Taylor-type rule simply recommends setting the policy rate equal to the value of r† plus 2 percent, which is the FOMC’s inflation target
- The policy rate is approximately at an appropriate setting today according to this analysis and with gap variables assumed to be zero
Author
Eren Sengezer
FXStreet
As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.
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