Fed’s Bullard says low U.S. ‘neutral’ interest rate unlikely to rise over next 2 years

• February 26, 2018
• realestate
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St. Louis Fed President James Bullard said Monday he does not think the so-called neutral U.S. interest rate is likely to rise much over the next two years.
“The natural, safe real rate of interest, and hence the appropriate policy rate, is relatively low and unlikely to change very much over the forecast horizon,” Bullard said in a speech to the National Association of Business Economics.

At issue is the theoretical real rate of interest, or R-star in economics jargon. The neutral rate is the rate at which gross domestic product is growing at its trend rate and inflation is stable.

Fed officials calculate that the neutral rate of interest has been very low since the financial crisis.

According to the minutes of the Fed’s January meeting, many Fed officials believe that the neutral level could start to trend higher. Some thought the rate might “move up more than anticipated as the global economy strengthened.”
All else equal, this would call for more rate hikes by the central bank. The Fed has penciled in three rate hikes this year and two or three next year.

Bullard is in the camp of Fed officials who do not think the Fed needs to become more aggressive.
In an interview last week, Bullard said he thought four rate hikes this year could slow the economy too much.

“If we go up 100 basis points in this environment, you are going to be restrictive in an environment where inflation is still below target,” he said