A member of the Federal Reserve’s monetary policy committee has given up on the prospect of the central bank raising interest rates back to historical levels, writing in a new paper Friday that it is time to consider a new “regime” to replace old thinking about the economy.
Federal Reserve Bank of St. Louis President James Bullard wrote that the narrative that the Fed “has been using since the financial crisis ended has now likely outlived its usefulness,” and that there are reasons to think that rates may not go up in the years ahead.
Instead, he estimated that the Fed may only raise its short-term interest rate target to 0.63 percent by 2018. That prediction is way out of line with other members of the Fed, who projected on Wednesday that the Fed would raise rates slowly but steadily to 2.4 percent over that time.
The projections released Wednesday, however, indicated that one member of the Fed saw things dramatically differently. It’s now clear that the member was Bullard, a macroeconomist known by Fed-watchers for sometimes rapidly changing his mind about monetary policy.
Bullard’s paper suggests several reasons that the Fed might not be able to raise rates much in the years ahead, such as that slow productivity growth will keep interest rates down, or that there will continue to be outside demand for government bonds for liquidity purposes, driving down yields on those instruments.
Although he is a voting member of the Fed’s monetary policy committee, Bullard did not dissent from Wednesday’s monetary policy statement, even though the statement calls for “gradual” rate hikes, which it’s now clear Bullard is not seeking.
In her press conference Wednesday, Fed Chairwoman Janet Yellen explained that the majority of the Fed, unlike Bullard, believes that rates will rise simply because they always have in the wake of recessions. “Many of us believe as a base case, it’s reasonable to assume that [market interest rates] will move up over time, but we’re not certain of that,” she said.
