James Bullard, Speech: The First Steps toward Disinflation

“The current U.S. macroeconomic situation is straining the Fed’s credibility with respect to its inflation target. In economic theory, expected inflation and actual inflation should be closely related. The current divergence between actual inflation readings and TIPS-based expected inflation will have to be resolved, possibly resulting in still higher inflation expectations. In the 1970s, inflation expectations became unmoored, and it took years for the Fed to bring inflation back to lower levels. The real economy was also volatile during this process.”

“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.”