The low-safe-real-rate environment will remain in 2017, the economy will not overheat and Trump administration policy will not affect rates this year, Federal Reserve Bank of St. Louis President James Bullard said Thursday.
The low-real-rate regime, which "is a global phenomenon," took "many years" to arise and is unlikely to turn around quickly. "This suggests that the regime will not go away naturally—therefore, a relatively low policy rate will remain appropriate," Bullard told the St. Louis Financial Forum, according to prepared text released by the Fed.
The Trump administration's policies, if directed to improving productivity in the medium term, could move the safe real interest rate up. He pointed to deregulation, infrastructure spending and tax reform as policies that could raise productivity levels in the coming years, while trade and immigration could change productivity in the longer term.
With inflation below 2%, "Consequently, it does not appear that undue inflationary pressure is building so far," he said.
As for monetary policy this year, Bullard reiterated, Trump policies will likely not have any impact until 2018 and 2019. He doesn't see signals of "meaningfully higher inflation" and return on safe short-term assets are likely to stay low. "These considerations suggest that the policy rate can remain fairly low in 2017," he explained.
Bullard suggested cutting the Fed's balance sheet could be seen as a sign of normalization without raising rates. "Now that the policy rate has been increased, the FOMC may be in a better position to allow reinvestment to end or to otherwise reduce the size of the balance sheet," he said.
FOMC policy is distorting the yield curve, he asserted. "The current FOMC policy is putting some upward pressure on the short end of the yield curve through actual and projected movements in the policy rate," he said, adding, "at the same time, current policy is putting downward pressure on other portions of the yield curve by maintaining a $4.45 trillion balance sheet."
He concluded, "Ending balance sheet reinvestment may allow for a more natural adjustment of rates across the yield curve as normalization proceeds."
