St. Louis Fed talks monetary policy after U.S. election

While global financial markets were surprised by election results Nov. 8, the president and CEO of the Federal Reserve Bank of St. Louis believes it’s too early to know how the U.S. economy will be impacted by Donald Trump’s presidential victory.

On Wednesday (Nov. 16), James Bullard spoke about U.S. monetary policy at the UBS European Conference 2016 in London. The St. Louis Fed, with branches in Little Rock, Louisville and Memphis, serves the states that comprise the Federal Reserve’s Eighth District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi.

Bullard highlighted four points about the monetary policy:

• Volatility wasn’t large in U.S. financial indicators after the election
• In the short term, macroeconomic and monetary policy outlook remains unchanged
• In the medium term, infrastructure improvements, regulatory changes and tax reforms might lead to faster GDP growth and productivity growth and more domestic investment
• In the long term, changes in trade and immigration might cause macroeconomic impacts.

Volatility has been “relatively subdued” after the election, “even with some divergence in bond and equity volatility,” according to a news release from the St. Louis Fed.

“The market expectation had been for continued divided government, and the election outcome was accordingly surprising,” Bullard said in the release. “However, the volatility in key U.S. macroeconomic variables has been in line with the volatility observed during the past year.”

One example is the 10-year U.S. Treasury yield, which has increased, but remains near the levels after the Federal Open Market Committee increased interest rates in December 2015.

Also, equities and foreign exchange rates have changed, but remain at levels experienced over the past year, he said.

Regarding the unchanged macroeconomic outlook over the short term, Bullard explained that U.S. unemployment is at FOMC’s estimate while U.S. inflation is low but near FOMC’s 2% goal and increasing. And, return rates are low and don’t look to change.

“A single policy rate increase, possibly in December, may be sufficient to move monetary policy to a neutral setting,” Bullard said.

Over the medium term, Bullard projected U.S. growth might be impacted by “a greater possibility of legislative action” with a Republican-controlled Congress and White House.

This action might include infrastructure spending, tax reform and regulatory changes.

When deciding on monetary policy, FOMC accounts for fiscal policy, Bullard said, and lower productivity growth has impacted GDP growth.

“A targeted fiscal infrastructure package aimed at increasing U.S. productivity growth may help to increase U.S. real GDP growth in the medium term,” he said. “Similarly, tax reform that allows repatriation of corporate profits earned abroad may enhance investment in the U.S.”

Bullard explained the United States added regulations after the 2007-2009 recession, but “it appears the pendulum may now swing back the other way.”

“Regulation is a large area affecting many businesses,” he said. “To the extent that there has been counterproductive regulation, its partial rollback may be beneficial for U.S. productivity and hence for economic growth.”

Over the long term, “trade arrangements can have important macroeconomic effects,” Bullard said. And “immigration reform would likely have important effects on the macro economy but perhaps over a longer horizon.”