James Bullard, Essay: Reflections on Monetary Policy in 2022
Fed Funds
“Further increases are anticipated to raise the policy rate to a sufficiently restrictive level that puts meaningful downward pressure on inflation.”
Restrictive Stance Defined
“What policy rate level is needed to exert downward pressure on inflation given the current macroeconomic situation in the U.S.? While there is plenty of debate on this question, a calculation I did in the spring suggested a policy rate of around 3.5% would be the minimum value needed to put downward pressure on inflation.5 This particular calculation relied on assumptions that were favorable to a lower interest rate, such as using the Dallas Fed trimmed mean PCE inflation rate, which has been running lower than headline or core PCE inflation.”
“More recent calculations using the same generous assumptions have yielded a higher minimum value. Results based on the latest trimmed mean PCE inflation rate, which is for September, suggested that it would take a policy rate of at least 4.9% to exert downward pressure on inflation. Thus, even under generous assumptions, the policy rate has not yet reached a level that could be considered sufficiently restrictive, according to these calculations.”
Next Phase of Policy
“With the moves the FOMC has made this year, we are approaching a point at which we will have removed monetary accommodation and can transition to what I would call ordinary monetary policy—that is, data-dependent policy that looks more like it did in the 1990s.”
“The policy rate will eventually reach a level the FOMC judges sufficient to put meaningful downward pressure on inflation. From there, the FOMC can adjust the policy rate up or down depending on incoming data without first having to get it from near zero up to a level considered appropriate for the inflation environment.”
“Exactly what that point will be and when it will occur remain to be determined, but I look forward to continuing to work with my FOMC colleagues to fulfill our dual mandate and to return inflation to the Fed’s 2% target.”