Normalization: A New Approach: James Bullard
Normalization: A New Approach: James Bullard
Normalization: A New Approach: James Bullard
A New Approach
James Bullard
President and CEO, FRB-St. Louis
Introduction
2
A new approach
The St. Louis Fed recently changed its approach to near-term
U.S. macroeconomic and monetary policy projections.
Wharton Business Radio interview, Aug. 12, 2016.
J. Bullard, “A Tale of Two Narratives,” remarks delivered at the
Gateway Chapter of NABE, St. Louis, July 12, 2016.
J. Bullard, “A New Characterization of the U.S. Macroeconomic and
Monetary Policy Outlook,” remarks delivered at the Society of
Business Economists Annual Dinner, London, U.K., June 30, 2016.
J. Bullard, “The St. Louis Fed’s New Characterization of the Outlook
for the U.S. Economy,” St. Louis Fed commentary, June 17, 2016.
All available on my webpage under “Key Policy Papers.”
3
Two narratives
An older narrative used by the St. Louis Fed over the last five
years or so has likely outlived its usefulness.
A new narrative is replacing the old narrative.
In this talk, I will describe in more detail the differences
between the two narratives.
4
Risks associated with this projected policy rate are likely to the
upside.
11
Source: FRB of Dallas and author’s calculations. Last observation: June 2016.
19
Productivity regimes
Source: Bureau of Labor Statistics, Bureau of Economic Analysis and author’s calculations.
Last observation: 2016-Q1.
24
Real-interest-rate regimes
The real rate of return on short-term government debt, r†, has
been exceptionally low, which we view as a “low-real-rate
regime.”
Appears to be highly persistent.
For forecasting purposes, we assume that we will remain in the
low-real-rate regime through the forecasting horizon.
Real-interest-rate regimes
Interpretation:
We think of low real rates of return on government paper (safe
assets) as reflecting an unusually high liquidity premium on
government debt.
Real returns on capital as calculated from GDP accounts are
not particularly low.*
Therefore, not all real returns in the economy are unusually
low.
Nevertheless, the real returns on safe assets are the ones most
closely linked to monetary policy.
* See P. Gomme, B. Ravikumar and P. Rupert, “Secular Stagnation and Returns on Capital,”
St. Louis Fed Economic Synopses, August 2015, No. 19.
26
Source: Federal Reserve Board, FRB of Dallas and author’s calculations. Last observation: June 2016.
27
Source: FRED, based on M. Chauvet and J. Piger, “A Comparison of the Real-Time Performance of Business Cycle Dating
Methods,” Journal of Business and Economic Statistics, January 2008, 26(1), 42-49. Last observation: May 2016.
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The policy rate path (63 basis points) supporting our output,
unemployment and inflation forecasts is regime-dependent.
Unemployment and inflation gaps ≈ 0.
A Taylor-type rule collapses to a Fisher equation
i = r† + π e + ϕπ π GAP + ϕu u GAP = r† + π e
i = 0.63% and π e = 2% imply (i – π e) = –1.37%
Very close to r† = –1.35%, the one-year ex post real interest
rate on government debt.
32
Source: Federal Reserve Board and author’s calculations. Last observation: July 2016.
33
Conclusion
St. Louis Fed’s characterization of the macro outlook
r† = real rate of return on short-term government debt
λ = productivity growth
High λ
High r † Low λ Upside risk to the
policy rate path
High λ
Recession
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Conclusion
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James Bullard
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