Just one more interest rate increase is needed, Fed's Bullard says

Low interest rates would be the norm over the next two to three years, a top US central bank official said.

In remarks prepared for a speech, the president of the Federal Reserve bank of St. Louis, James Bullard, said that a single 25 basis point rate hike would get the monetary authority very close to the level recommended by a so-called Taylor-type policy rule.

With then current rates of unemployment and inflation near the Fed's target levels the key determinants were rate-setters inflation target of 2% and the real rate of return on safe assets, which he estimated at negative 134 basis points.

The result of 68 basis points would nearly be reached by just one further 25 basis point rise in the Fed funds rate, Bullard told the Association for University Business and Economic Research (AUBER).

That real safe rate of return was also unlikely to change over the Fed's forecast horizon, he added.

Bullard noted two factors which had been putting downward pressure in real safe rates of return: a low productivity-growth regime in the US and a high liquidity premium regime, "in which investors are willing to pay premium prices for safe assets like government debt".

“Real safe rates of return are exceptionally low at present and are not expected to rise soon,” Bullard said.

“This means, in turn, that the policy rate should be expected to remain exceptionally low over the forecast horizon,” he concluded.