Bullard Compares SEP, Market Views of Normalization

The Federal Open Market Committee plans to gradually return rates to "normal" levels while the markets see a shallower path, Federal Reserve Bank of St. Louis President James Bullard noted Thursday.

Each scenario has benefits, Bullard told the 35th UC Santa Barbara Economic Forecast Project, according to prepared text released by the Fed. "Evidence from labor markets, inflation readings and global influences suggests the FOMC median projection may be more nearly correct," he said. "Evidence from readings on GDP growth and market-based inflation expectations suggests the market view of the path of the policy rate may be more nearly correct."

"The FOMC has laid out, via the Summary of Economic Projections, a data-dependent 'slow normalization,' whereby the nominal policy rate would gradually rise over the next several years provided the economy evolves as expected," he said. "Market-based forecasts of FOMC policy, in contrast, envision 'almost no normalization,' whereby the policy rate would be changed only a few times in the next several years."

The FOMC's position is boosted by "relatively strong U.S. labor markets, inflation measurements that are closer to the FOMC's target of 2 percent, and waning international headwinds," he said, while "the slow growth of U.S. real gross domestic product (GDP) and low U.S. inflation expectations" favor the market's projections.

Calling labor markets "relatively tight," Bullard said, they are at or beyond full employment levels. Inflation has "been trending somewhat higher" after oil price drops. Also international economic effects on the U.S. "appear to be waning," with financial stress down and the stronger dollar not hampering the economy.

Real GDP, he notes, suggests growth of less than 2% since the second half of 2015. As oil prices fell, so did inflation expectations. "Recently, market-based inflation expectations have recovered somewhat," he said. "However, they remain low compared with the levels observed in the summer of 2014."

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