St Louis Fed Chief: Interest rates OK despite low jobless rate, risk of inflation

St. Louis Federal Reserve President James Bullard said Monday (Aug. 7) even though the nation’s low unemployment rate could cause inflation to rise, short-term interest rates should remain where they are for now.

“The current level of the policy rate is likely to remain appropriate over the near term,” Bullard said at the 2017 conference of America’s Cotton Marketing Cooperatives in Nashville, Tenn.

The St. Louis Fed chief comments come less than two weeks after the Federal Open Market Committee (FOMC) at a two-day meeting July voted to hold interest rates steady because of interest rate concerns. The nation’s monetary policy is made by the FOMC, which consists of the members of the Board of Governors of the Federal Reserve System and five Reserve Bank presidents. The July meeting was one of eight regular conferences scheduled for this year, and is seen by some as pivotal as they debate over future rate hikes in the near term.

Bullard oversees the Federal Reserve’s Eighth District, which has branches in Little Rock, Louisville and Memphis, and serves the states that include all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi.

The Fed did raise interest rates for the second time in 2017 as expected at the June FOMC meeting, where the central bank also decided to scale back the nation’s $4.5 trillion balance sheets that include goverment bonds, mortgage-backed securities and other assets purchased to keep the nation’s economy afloat following the financial crisis.

“In view of realized and expected labor market conditions and inflation, the (FOMC) decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent,” Fed Chair Janet Yellen said on July 16. “The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.”

Besides talking about U.S. monetary policy at the Nashville conference, Ballard also discussed the “low-growth regime” of the nation’s economy since the Great Recession. He also spoke in detail about recent inflation outcomes, which he said “have been unexpectedly low.”

The Federal Reserve banker also discussed was whether the low U.S. unemployment rate means inflation is about to increase substantially. Bullard said data since the financial crisis suggest that the U.S. has converged to real GDP (Gross Domestic Product) growth of 2%, 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% trend growth,” Bullard said of the nation’s economy, which grew at an annual rate of 1.9%t in the first half of 2017. “The 2% growth regime appears to remain intact.”

Bullard said the U.S. inflation rate has been below the FOMC’s 2% inflation target since 2012. He also examined several inflation measures that try to control for particularly volatile movements in individual prices and noted that those readings have been lower this year.

“Recent inflation data have surprised to the downside and call into question the idea that U.S. inflation is reliably returning toward target,” he said, adding that global commodity prices have been an important factor affecting U.S. headline inflation.

“Crude oil prices, in particular, tend to influence the headline inflation rate.”

Bullard also said global commodity prices are sensitive to perceived and actual supply and demand developments in the global crude oil market. Another factor may be the “financialization” of global commodity markets in recent years, which may have made some commodities more closely tied to oil prices than in the past, he said.

Bullard noted that recent labor market outcomes have been relatively good and discussed the question of whether the low U.S. unemployment rate — at 4.3% in July — might signal a substantial rise in inflation.

“The short answer is no, based on current estimates of the relationship between unemployment and inflation,” he said. “Even if the U.S. unemployment rate declines substantially further, the effects on U.S. inflation are likely to be small.”

Turning to global growth, Bullard noted that the International Monetary Fund upgraded its world economic outlook for 2017, with key upgrades for Japan, Europe and China.

“The value of the U.S. dollar has declined in 2017, a consequence of the brighter growth outlook for Europe and expectations for a somewhat more hawkish European Central Bank,” said the St. Louis Fed chief.