James Bullard, Interview: Council on Foreign Relations virtual meeting

“Yeah, I gave a speech, for those that are interested, at University of Missouri here about 10 days ago where I talked about a 3.5% being a minimum about where you’d want to be based on simple Taylor Rule type calculations. But the reason I say it’s a minimum is that I gave a lot of very kind assumptions in setting up the Taylor Rule, you forget about the output gap, or unemployment gap component, just set that part to zero, put a R-star in of very generous minus 50 basis points, use Dallas Fed trim mean as your measure of inflation, so that’s the lowest one of the ones we track, 3.6%, use a relatively small coefficient on that inflation gap. If you do all those generous things when you’re looking at a Taylor Rule you still get that we should be at 3.5% on the funds rate, so you can’t do it all at once, but I do think it behooves us to try to get to that level by the end of this year.”

“Yeah, more than 50 basis points is not my base case at this point. I would point out that the 1994 cycle where we raised the policy rate 300 basis points in a year, first of all, that one was successful and did set up the US economy for a speller second half of the 1990s, one of the best periods in US macroeconomic history, so it was successful, and in that cycle there was a 75 basis point increase at one point. So I wouldn’t rule it out, but it’s not my base case here. And I would stress, as I did in my opening statement that the market pricing is doing some of the work for the fed for it, so what we really need to do is just ratify the promised increases in the funds rate that we’ve already got out there that are partially priced into markets, and so there isn’t as much need to surprise as there may have been in ’94 when the fed had less credibility on its 2% inflation target.”