US interest rates approximately where they need to be, Fed's Bullard says
By Alexander Bueso
Date: Monday 08 May 2017
(ShareCast News) - Interest rates in the US are approximately where they need to be, under certain assumptions, a top US rate-setter said.
Speaking at Amelia Island, Florida Federal Reserve bank of St.Louis president James Bullard said the so-called 'natural' rate of interest rates depended on three factors: the rate of growth of the labour force, that of labour productivity and investor demand for safe assets.
Before the Great Recession, the rate of growth in the US labour force was in a high-growth state, with the labour force growing by 1.33% per year, but had since slipped into a low-growth state with the labour force expanding by roughly 0.45% a year.
In the former of those two states, and assuming haven demand was in a high-demand state and productivity was in a low growth state, then the appropriate policy rate would be between 0.67%, versus about 0.88% at present, and 1.55% in the latter scenario - following a Taylor rule which recommends setting rates two percentage points above the natural real rate of interest.
The desirability of safe assets (or not) was the most important determinant of real interest rates, he also explained, saying it contributed between -3.04% and 0.63% to the equilibrium level of the real interest rate.
The above range also assumed the US unemployment and inflation gaps were at zero.
So if the rate of growth in the labour force was in a low-growth state then the current setting of interest rates was "appropriate" he said.
"The policy rate is approximately at an appropriate setting today according to this analysis and with gap variables assumed to be zero."
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