A Low Inflation Surprise for U.S. Monetary Policy

Federal Reserve Bank of St. Louis President and CEO James Bullard

Does low unemployment signal a substantial rise in inflation? Bullard says that “the short answer is no.”

Federal Reserve Bank of St. Louis President James Bullard gave remarks on “A Low Inflation Surprise for U.S. Monetary Policy” at the 2017 conference of America’s Cotton Marketing Cooperatives on Monday.

After providing a brief background on the Federal Reserve, including its decentralized structure and the role of the Federal Open Market Committee (FOMC), Bullard noted that the FOMC’s goals include good labor market performance and an inflation target of 2 percent. “Financial stability is sometimes considered as an additional goal, but can be more directly addressed through regulatory policy. This remains a hot topic,” he said.

He then turned to some key aspects of today’s macroeconomic situation. In particular, he examined the low-growth regime in the U.S. since the recession. He also discussed recent inflation outcomes, which he said “have been unexpectedly low,” and their connection to global commodity markets. In addition, he looked at whether the low U.S. unemployment rate means that inflation is about to increase substantially. Regarding the global economy, he discussed the impact of upgrades to the global growth outlook on the U.S., specifically implications for the value of the U.S. dollar.

Bullard also addressed what the current macroeconomic situation means for the policy rate (i.e., the federal funds rate target). “The current level of the policy rate is likely to remain appropriate over the near term,” he said.

Low growth

In looking at U.S. economic growth, Bullard said data since the financial crisis suggest that the U.S. has converged to real GDP growth of 2 percent, which is slow by historical standards.

“Second-quarter real GDP growth showed some improvement from the first quarter, but not enough to move the U.S. economy away from a regime characterized by 2 percent trend growth,” he said. Real GDP grew at an annual rate of 1.9 percent in the first half of 2017. “The 2 percent growth regime appears to remain intact,” he added.

Low inflation

Turning to inflation, Bullard noted that the U.S….

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