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
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