Using a Taylor-type rule and given the low natural real rate of interest, monetary policy targeting a federal funds rate between 1.25% and 1.5% is appropriate, Federal Reserve Bank of St. Louis President James Bullard said Monday.
“The regime-switching approach suggests that the current setting of the policy rate is broadly appropriate,” he told the NABE Annual Economic Policy Conference, according to prepared text released by the Fed, adding r-star (the natural real rate of interest) probably won’t change in the next two years. “This suggests forward guidance should be characterized by a relatively flat policy rate path, as opposed to an upward-sloping one that would be appropriate if r-star has strong mean reversion.”
He warned, “if the [Federal Open Market] Committee raises the policy rate substantially from here without other changes in the data, the policy setting could become restrictive.”
Bullard is not an FOMC voter this year.