Low inflation does not warrant keeping the fed funds rate target near zero, according to Federal Reserve Bank of St. Louis President James Bullard.
"The [Federal Open Market Committee] has indicated that the policy rate is likely to rise next year, with the exact timing dependent on macroeconomic data in coming quarters," Bullard said at a financial forum hosted by the St. Louis Regional Chamber on Friday, according to a release from the Fed. "Analysts sometimes cite the current low level of inflation as a reason why the FOMC may wish to remain at the zero lower bound for even longer. However, while a low inflation rate may suggest a somewhat lower-than-normal policy rate, that effect is not large enough to justify remaining at the zero lower bound."
Labor markets have improved with the unemployment rate dropping more rapidly than the FOMC expected, and is currently within "the range of longer-run or normal values suggested by the SEP ranges."
In the coming year, Bullard said, "it will become more and more difficult to point to labor market performance as a rationale for a near-zero policy rate."
Market-based measures of inflation expectations, which had dropped, have rebounded in the past month. "Most likely, these expectations will rise back toward the FOMC's inflation target in coming months and quarters," Bullard said. "However, this bears careful watching. Inflation and inflation expectations moving away from target is a concern."
He called fears of a global recession, which fueled recent volatility in financial markets, "overstated," since "U.S. macroeconomic fundamentals seem strong" and the Fed "would most certainly respond" to such developments.
