There's a New Bullard Rule That Finds No Need to Raise Rates
(Bloomberg) -- Federal Reserve Bank of St. Louis President James Bullard is proposing a new monetary policy rule -- effectively the Bullard rule -- that updates popular policy guidelines such as the Taylor Rule and concludes there’s no reason to raise interest rates further.
Bullard’s benchmark adjusted the Taylor rule for developments in the past two decades, such as the weak link between the unemployment rate and inflation, the aging of the U.S. population and low inflation expectations.
“Incorporating these developments yields a modernized policy rule that suggests the current level of the policy rate is about right over the forecast horizon,’’ or the next several years, Bullard said Thursday in a speech in Memphis, Tennessee.
The Federal Open Market Committee discussed raising rates to a “restrictive’’ level, or a rate that would slow growth, at its meeting last month, according to a record of that debate released Wednesday. Fed officials projected that rates would rise to 3.4 percent by 2020, their latest forecasts show. The Fed has raised rates three times this year and has penciled in a fourth hike, which is expected in December.
Bullard has been the most dovish Fed official the past two years. He’s argued that the U.S. economy has been saddled with persistently low growth, so there is little need to raise interest rates much. His development of a rule is an effort to provide some academic justification to his viewpoint.
“The modernized version of the Taylor (1999) rule recommends a relatively subdued policy rate path over the forecast horizon -- similar to the St. Louis Fed’s recommended path,’’ Bullard said.
The Taylor Rule was developed by Stanford University professor John Taylor, who has preferred his original rule as a guideline for policy, which suggests further rate hikes are necessary.
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