James Bullard, Speech: The First Steps Toward Disinflation

“Before the pandemic, at the end of 2019: The U.S. economy was growing at 2.6%, the headline PCE inflation rate was 1.5%, and the unemployment rate was 3.6%.

• The policy rate associated with these outcomes was 1.55%.
• Policy was not expected to change much going forward. Accordingly, the 2-year Treasury yield was 1.61%.
• Longer-term rates were moderate, with the 10-year Treasury yield at 1.86% and the 30-year fixed rate mortgage at 3.96%.

This may provide a practical benchmark for where the constellation of rates may settle once inflation comes under control in the U.S.

• The fact that market interest rates have moved above their pre-pandemic benchmarks while the policy rate has not can be read as an illustration of the effect of credible forward guidance.
• The Fed still has to follow through to ratify the forward guidance previously given, but the effects on the economy and on inflation are already taking hold.”