The fed funds rate target is not far from the appropriate level, given the low natural rate of interest, Federal Reserve Bank of St. Louis President James Bullard said Monday.
“[T]he natural rate of interest, and hence the appropriate policy rate, is low and unlikely to change very much over the forecast horizon,” Bullard said in a speech in Florida, according to text released by the Fed.
Using a Taylor-like rule, Bullard determined the appropriate fed funds rate is “either 67 basis points or 155 basis points,” with the difference determined by whether the labor force is considered in a low-growth or high-growth situation. The current policy rate is approximately 88 basis points, he noted. “The policy rate is approximately at an appropriate setting today according to this analysis and with gap variables assumed to be zero,” he said.
Bullard studied “three factors that can influence the natural rate: 1) the labor productivity growth rate, 2) the labor force growth rate, and 3) an investor desire for safe assets. He included the third factor because the declining trend appears to be on real returns to holding government paper, not on capital.”