James Bullard, Speech: Is the Fed behind the Curve? Two Interpretations

Bullard reiterated that modern central banks have more credibility than they did in the 1970s and they also make more use of forward guidance. “As a result, indications of future policy rate increases are incorporated into current financial market pricing, before policy actions are taken,” he said.

In light of the Fed’s forward guidance since the fourth quarter of 2021, the 2-year Treasury yield may provide a better representation of where Fed policy is likely to be in the near future, Bullard said. The value of the 2-year Treasury yield on April 4 was 2.43%, about 100 basis points shy of the rate recommended in the simple Taylor-type rule calculation, he said. “This suggests the Fed is not as far ‘behind the curve,’ although it would still have to raise the policy rate to ratify the forward guidance,” Bullard said.

He emphasized that the recommended policy rate of 3.5% from the Taylor-type rule calculation involved some choices, and that a higher value for the real interest rate (“R-star”) or a broader definition of inflation would lead to the rule recommending a much higher value for the policy rate. “Therefore, the second interpretation probably still leaves the Fed behind the curve but by less than it appears based on the first interpretation,” he said.