Bullard Reiterates Case for Rate Hike

Normalization of interest rates should begin, Federal Reserve Bank of St. Louis President James Bullard repeated Friday.

Noting, “the currently stark difference between FOMC objectives, which are arguably nearly attained, and FOMC policy tools, which remain on emergency settings,” Bullard said, “A simple and prudent approach to current policy would be to begin normalizing the policy settings in an effort to extend the length of the expansion and to avoid taking unnecessary risks associated with exceptionally low rates and a large Fed balance sheet.”

Speaking at the Shadow Open Market Committee meeting, Bullard added despite a rate increase, “policy would remain extremely accommodative for several years, even as normalization proceeds, and that this accommodation would help to mitigate remaining risks to the economy during the transition,” according to prepared text released by the Fed.

The latest Summary of Economic Projections (SEP) “indicated an unemployment rate of around 4.9% is likely to be consistent with longer-run equilibrium,” with the rate currently 0.2 percentage points higher and trending down.

To gauge inflation, Bullard suggested using the Dallas Fed’s trimmed mean PCE inflation measure, which is showing inflation of 1.7%. “This is low, but still reasonably close to target,” he added, although monetary policy remains “far from normal.”

“[T]he most prudent course of action is to begin to normalize the policy rate slowly and gradually, under the interpretation that the Committee will still be providing considerable monetary accommodation to the economy to guard against potential pitfalls and risks as the quarters and years ahead unfold,” he said. “By adopting this prudent approach to monetary policy strategy, policy tools will eventually be returned to the toolbox, and the Committee may be able to lengthen the expansion longer than it may otherwise extend.”

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