The Federal Reserve can be patient in setting monetary policy and the current rate may be the right level for the forecast horizon, Federal Reserve Bank of St. Louis President James Bullard said Friday.

“The [Federal Open Market Committee] can wait and see how key macroeconomic developments play out in the quarters ahead,” Bullard told the Illinois Bankers Association’s annual conference in Nashville, Tenn., according to materials released by the Fed. “The current level of the policy rate is appropriate given current macroeconomic data.”

Federal Reserve Bank of St. Louis President James Bullard.
"Recent inflation data have surprised to the downside and call into question the idea that U.S. inflation is reliably returning toward target," Federal Reserve Bank of St. Louis President James Bullard noted. Bloomberg News

While the country is stuck in a low-growth, low-inflation, low-interest-rate regime, he said, “Many future developments could impact this policy path, but the Fed does not need to pre-empt any of them.”

Real gross domestic product growth in the first and second quarters of 2017 will fall shy of 2.1% trend growth seen in the past seven years. “The 2 percent growth regime,” he noted, “appears to remain intact.”

Inflation, he said, has not met the Fed’s 2% target since 2012 and future prospects are murky. “Recent inflation data have surprised to the downside and call into question the idea that U.S. inflation is reliably returning toward target,” Bullard noted.

Bullard noted, “The financial market reaction has been reflected in a lower U.S. 10-year Treasury yield, lower market-based U.S. inflation expectations and an implied policy rate path closer to the St. Louis Fed path for 2017 and 2018 of 113 basis points.”

The low unemployment rate should not translate into a big rise in inflation, he said. “Even if the U.S. unemployment rate declines substantially further, the effects on U.S. inflation are likely to be small.”

Bullard spoke of the improvement in financial conditions following the December 2016 FOMC meeting, and how some suggest this shows rate hike are not working. But, since the improvement is measured by the standard financial conditions indexes, which can be moved by low volatility, higher equity valuations and lower credit spreads, “It is far from clear that a goal of monetary policy is to cause a deterioration in these aspects of financial markets.”

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