While monetary policy has become more accommodative than it was six months ago, GDP should grow faster than potential for the next two years, Federal Reserve Bank of St. Louis President James Bullard said Thursday.
"I have argued that the U.S. potential growth rate is lower today than it has been in the recent past, about 2.3 percent," Bullard said during an economic forecast luncheon sponsored by the Wisconsin Bankers Association, according to a Fed release. Bullard forecast "real GDP growth will be faster than potential, at around 3.2 percent in both 2013 and 2014," based on easier monetary policy, reduced headwinds and reduced uncertainty.
More good news: Bullard sees the unemployment rate falling and inflation "near target."
Bullard applauded the FOMC December move toward use of inflation and unemployment thresholds rather than dates to determine when rates will rise. "The Committee is no longer sending the pessimistic signal, because the threshold conditions can be met at any time."
The FOMC still faces some challenges, he noted. "The use of thresholds is not a panacea," Bullard cautioned. "The FOMC cannot pretend to target medium- or long-term unemployment." In addition, "The Committee needs to reiterate that it considers many more variables in attempting to gauge the state of the U.S. economy." Finally, he said that "the thresholds will likely be viewed as triggers for action."
In explaining why he views monetary policy as more accommodative today, Bullard cited several reasons on the balance sheet side: the FOMC undertook QE3; the QE3 program is open-ended and state-contingent, making it more effective; and the FOMC replaced the twist program with outright purchases. On the interest rate side, Bullard cited the revised policy rate guidance, which helped to alleviate the pessimism problem.
