While the macroeconomy moves toward a normal level, monetary policy is "not close" to its pre-crisis position and getting there will be a challenge, Federal Reserve Bank of St. Louis President James Bullard said Monday.
"The monetary policy stance remains far from normal, despite recent reductions in the pace of asset purchases," Bullard told the Tennessee Bankers Association, according to prepared text released by the Fed. "The Committee now faces a classic challenge concerning the appropriate pace of monetary policy normalization."
With unemployment dropping, and inflation moving toward the Fed's 2% target, Bullard noted, "the FOMC is much closer to its macroeconomic goals" than it has been in five years.
Bullard calculated how far the economy is from the Federal Open Market Committee goals using a function that compares the gap between inflation and the Fed target and between the unemployment rate and its long-term average.
Despite the tapering in the pace of its asset purchases, Bullard said the Fed balance sheet remains large and continues to rise, while the policy rate is still zero bound.
Labor market softness and low inflation, Bullard said, have kept monetary policy "far from normal" despite the economy nearing the Fed objectives.
"With inflation still below target, albeit rising, and unemployment still high, but falling, the Committee faces a classic monetary policy challenge," Bullard said. The challenge is how fast the FOMC should act to move monetary policy to normal given improving macroeconomic conditions. "The debate on this topic is likely to garner significant attention as the economy continues to improve during 2014," he concluded.
