President Bullard has lowered his long-run rate estimates from 4.25% to below 4% in a nod to lower long-run potential. But he would not go as low as 2%, as he is not that pessimistic about our economy’s growth potential to imply a zero real Federal Funds Rate (after 2% inflation is taken out).
Author’s Note: I believe this is going to be a major issue the market needs to contend with—as it seems partially unprepared for the Federal Funds Rate to eventually reach the types of levels Bullard and the FOMC discuss.
Is the Dollar Rise Equivalent to a Tightening of Policy?
Bullard stated that a year ago at this time, he saw zero probability attached to the European Central Bank (ECB) doing quantitative easing (QE). It was supposed to be a year of recovery for Europeans in 2014—but in fact things got worse for Europe, and inflation dipped far below their target. The ECB resisted unconventional monetary policies for the last five years, but now it has embraced them with a big QE program. This sent yields in Europe lower and had a spillover in sending yields down in the U.S. This was a “freebie” for the Fed in getting additional stimulus from Euro QE and to Bullard is a bullish factor for growth in the U.S. economy for 2015.
This was a total surprise to everyone in 2014—including President Bullard—who thought interest rates were going higher. They didn’t, which in Bullard’s view is entirely due to ECB easing.
If the ECB is going to ease and the Fed is going to raise rates, Bullard said one would expect a strong dollar.
Why Is Productivity Growth Disappointing Right Now?
Bullard suggested one explanation for low productivity was the re-regulation of the economy—changing the rules, putting stricter controls and rules in place. Bullard suggested that firms are really good at optimizing business plans if they know a set of rules, but uncertainty prevents big investment spending.
Bullard also said the main thing the U.S. can do to achieve better growth is to have a national conversation on how to get productivity improving—especially getting people the right type of training, given the large skill premium that exists.
Read the Conversations with Professor Siegel series here.
Important Risks Related to this Article
Investments focused in Europe are increasing the impact of events and developments associated with the region, which can adversely affect performance.