Fed should only raise rates once more until 2018, Bullard says

One of the US central bank’s often most hawkish top officials changed his stripes, turning into one of the most dovish members of the Federal Open Market Committee, the Fed’s main policy-making body.

One and done

In a new paper published on Friday, the president of the Federal Reserve bank of St.Louis revealed himself as the lone top policy-maker who was now expecting just one more 25 basis point rate hike and then no further increases until the end of 2018.

Bullard argued there was now a need to think about medium and longer-term macroeconomic outcomes in terms of ‘regimes’ instead of a single long-run destination towards which the economy was headed.

“Regimes are generally viewed as persistent, and optimal monetary policy is viewed as regime dependent. Switches between regimes are viewed as not forecastable.”

Perceived certainty on long-run growth may be misleading

Furthermore, the new approach means backing off from the idea “that we have dogmatic certainty about where the US economy is headed in the medium and longer run. We are trying to replace that certainty with a manageable expression of the uncertainty surrounding medium- and longer-run outcomes,” Bullard said.

At present, the new approach used by Bullard defines the US economy as currently occupying three regimes: low productivity growth, low real rates and a non-recessionary business cycle.

That combination of regimes yielded forecasts for real US output growth of 2%, unemployment at 4.7% and trimmed-mean PCE inflation of 2.0% - with a resulting requirement for policy rate path of 63 basis points over the forecast horizon to the end of 2018, Bullard said.

At the time of writing the Fed’s target range for short-term rates stood at between 0.25% and 0.50%, with a mid-point of 37.5%.