St. Louis Fed’s Bullard Discusses Monetary Policy, the New Fiscal Policy and the Fed Balance Sheet

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

The Fed can take a wait-and-see posture regarding possible fiscal policy changes.

Federal Reserve Bank of St. Louis President James Bullard discussed “Current Monetary Policy, the New Fiscal Policy and the Fed’s Balance Sheet” at a meeting of the Economic Club of Memphis on Friday.

During his presentation, Bullard shared his views on the state of the U.S. economy and how it affects his outlook for the policy rate (i.e., the federal funds rate target). “The U.S. economy has arguably converged to a low-real-GDP-growth, low-safe-real-interest-rate regime,” he said, adding that it is unlikely to change dramatically in 2017. “Because of this, the Fed’s policy rate can remain relatively low while still keeping inflation and unemployment near goal values.”

He also discussed whether possible fiscal policy changes may impact the regime. “The new fiscal policy could impact productivity growth and therefore improve the pace of real GDP growth,” he said, adding that the Fed can wait and see how this new policy evolves.

Finally, regarding the Fed’s balance sheet, Bullard noted that now may be a good time for the Federal Open Market Committee (FOMC) to consider allowing the balance sheet to normalize by ending reinvestment. “Ending balance sheet reinvestment may allow for a more natural adjustment of rates across the yield curve as normalization proceeds,” he said.

The Low-Growth, Low-Safe-Real-Rate Regime

In discussing the U.S. economy’s low-growth regime, Bullard examined the slower pace of real GDP growth, labor market improvement and productivity growth.

He noted that real GDP growth, as measured from one year earlier, has averaged just…

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