Bullard says policy close to neutral, yield curve may invert

Register now

Inflation is expected to grow, but remain below target, and the yield curve may invert in the next year, Federal Reserve Bank of St. Louis President James Bullard said Wednesday.

The nominal yield curve has been flattening since 2014, as short-term rates rose while long-term rates were relatively stable. “It is possible that the nominal yield curve will invert sometime in the next year, but recently the 10-year yield has increased enough to keep pace with the FOMC’s rate increases,” Bullard told the Arkansas Bankers Association, according to prepared text released by the Fed.

An inverted yield curve, often signals a coming recession.

With the neutral real rate (or r-star) near zero and inflation, measured by year-over-year change in core personal consumption expenditures, at 1.6%, and current monetary policy at 1.5% to 1.75%, policy minus core PCE is near r-star, suggesting, he said, “the current policy setting is closer to neutral than in previous years.”

Being neutral, rather than accommodative or restrictive, “is appropriate for the current situation, in which inflation is not far below target and is expected to rise,” Bullard said, adding “it is not necessary in this circumstance to raise the policy rate further in order to put downward pressure on inflation, since inflation is already below target.”

Inflation expectations, he said, “are closer to being in line with the FOMC’s 2 percent inflation target, but remain a bit low.”

While GDP surprised to the upside globally in 2017, “The effects of the surprise seem to have abated during the first months of 2018 in the face of uncertain first-quarter U.S. real GDP growth along with other factors.”

Some factors Bullard specified were seasonal issues, uncertain U.S. trade policy, higher U.S. interest rates and possible tech sector regulation.

For reprint and licensing requests for this article, click here.
Monetary policy James Bullard Federal Reserve Federal Reserve Bank of St. Louis