Bullard believes current rate appropriate, no hikes needed

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The Federal Reserve does not need to raise the federal funds rate target, as inflation has failed to reach 2%, Federal Reserve Bank of St. Louis President James Bullard said Tuesday.

Additionally, he said, gross domestic product in 2018 will probably not match levels seen in the last half of this year.

As such, the current federal funds rate target “is likely to remain appropriate over the near term,” he said in a speech in Louisville, Ky., according to prepared text released by the Fed.

“Inflation data during 2017 have surprised to the downside and call into question the idea that U.S. inflation is reliably returning toward target,” Bullard noted. The Federal Open Market Committee expects core PCE inflation at 1.5% at the end of 2017. “If the Committee is going to hit the inflation target, it will likely have to occur in 2018 or 2019.”

The two most-mentioned factors that could lift inflation are inflation expectations and more economic growth. “Expected inflation measures based on Treasury Inflation-Protected Securities (TIPS) remain relatively low,” Bullard said, noting “survey-based measures have also slipped in the last year.”

Oil prices also play a role in expectations, but recent rises are seen as “limited.”

Bullard said since the financial crisis, “the U.S. has converged to 2 percent real GDP growth.” Real GDP rose at a 2.1% annual rate in the first half of 2017, with estimates that the second half will come in near 3%.

But, “real GDP growth will likely be slower in 2018 than it has been in the second half of 2017,” he stated.

Low unemployment rates will not spur inflation, he said, since the two are not as connected as they were two decades ago. “Even if the U.S. unemployment rate declines substantially further, the effects on U.S. inflation are likely to be small,” he said.

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Monetary policy James Bullard Federal Reserve Federal Reserve Bank of St. Louis FOMC