WASHINGTON, Aug. 3 (Reuters) – The coronavirus pandemic may have pushed the United States into a volatile era of stronger growth and better productivity, but also higher interest rates and faster inflation, a St. Louis Federal Reserve Chairman James Bullard said, elaborating on why he thinks the US central bank should end its crisis policies.
Bullard, who said five years ago that he saw the United States as mired in a time of low growth, low productivity and low inflation, said he was beginning to think that a new “regime” could have happened where the Fed will face faster change and more frequent shocks.
For more than a decade before the pandemic, “economic growth was slow and not very volatile and inflation in tandem was slow and not very volatile,” Bullard said in an interview with Reuters on Monday. “This environment is very different where you have upset the global balance … The reverberations will continue, and you will have a lot more volatility than usual.”
On the positive side, it could mean a series of productivity-enhancing developments that keep US growth and wages rising rapidly; the risk is higher inflation that could upset the Fed’s current expectation that price pressures will subside on their own and allow monetary policy to remain accommodative.
“We will have long, lingering effects as the rest of the world recovers. You have shortages and bottlenecks everywhere. You have Europe likely to grow faster in the next few quarters,” Bullard said. “You have industries that are still adjusting to the post-pandemic world – a lot is happening, and at a rate that we’re not used to.”
In this context, “monetary policy must be more agile”.
CHANGE IN A FUNDAMENTAL WAY
His comments are accompanied by a specific policy recommendation: that the Fed soon start cutting its $ 120 billion in monthly asset purchases, reduce them to zero by the start of next year, and be ready to go. raise interest rates if inflation threatens to stay too high for too long. . After missing its 2% target during a decade of low inflation, the Fed wanted to encourage a period of faster price increases, but now risks getting too much of what it asked for.
But his views speak from a deeper perspective: that the economy may have changed fundamentally over the past 18 months, leaving the Fed to look at a different landscape than when it established a new framework ago. barely a year.
This framework envisages giving more weight to employment growth and allowing inflation to exceed 2% for a period of time to allow employment to grow.
With faster economic growth and higher than expected inflation, external analysts noted that the approach involved navigating difficult ground – allowing unemployment to drop below what is considered a sustainable rate before returning. at its “natural” level.
“The cooling of an overheated labor market has rarely ended without a recession,” wrote JPMorgan economist Michael Feroli in mid-July, concluding that while the new Fed executive was not doomed to Failure, he said, has increased the likelihood of a “hard landing” when the central bank has to raise interest rates. The policy rate is currently near zero, and Fed officials at the median won’t see it change for some time in 2023.
Bullard said his call for faster action to end bond buying was aimed at reducing that likelihood, taking smaller and earlier steps rather than risking the need to “fall out” later.
The United States and global economies may not have changed much. While a model of productivity that Bullard watches shows improvement, it also did so after the last recession ended before it subsided.
Yet current inflation is well above the Fed’s target, and at levels that previous Fed chairmen like Alan Greenspan “would have immediately tried to reverse,” Bullard said. “We’re not that preemptive. Our models say it’s going to set in, but in the meantime it’s going to be pretty volatile… What I want to be prepared for and prepare the committee for is the risk that it is unforeseeable situation. “
Reporting by Howard Schneider; Editing by Andrea Ricci
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