St Louis Fed Chief : Does Low Inflation Justify ZIRP
President James Bullard dissects the nearly six years of Zero Interest Rate Policy and asks the question: does low inflation call for an earlier return to normal interest rate policy.
During his presentation, Bullard noted that the policy rate has remained near zero for almost six years and discussed whether current macroeconomic data can rationalize this exceptionally low setting for the policy rate. “Labor markets have shown steady improvement this year,” he said, adding, “Lower longer-term interest rates and lower oil prices in recent months should provide additional tailwinds for U.S. macroeconomic performance.”
Inflation, however, is currently running below the Federal Open Market Committee’s (FOMC’s) target rate of 2 percent. In addition, he cited market-based measures of inflation expectations, which declined in recent months but have reversed course. “Global factors, including low inflation in Europe and lower oil prices, may be temporarily holding inflation down in the U.S.,” he said, adding that inflation is generally projected to rise toward the FOMC’s target.
“The FOMC has indicated that the policy rate is likely to rise next year, with the exact timing dependent on macroeconomic data in coming quarters,” Bullard noted. “Analysts sometimes cite the current low level of inflation as a reason why the FOMC may wish to remain at the zero lower bound for even longer. However, while a low inflation rate may suggest a somewhat lower-than-normal policy rate, that effect is not large enough to justify remaining at the zero lower bound.”