The Federal Reserve's key interest rate is at a level that is "about right," and further rate hikes may not be necessary over the next few years, St. Louis Fed President James Bullard said Oct. 18.
Bullard has repeatedly advocated for patience on rate hikes, saying inflation expectations are tame and that the Fed should look past what should be a temporary lift to the economy from tax cuts, among other things.
But most of his colleagues at the U.S. central bank have backed continuing their gradual pace of interest rate hikes. The Fed has raised its benchmark federal funds rate three times this year and is expected to do so again in December.
In an Oct. 18 speech, Bullard said a modernized version of the Taylor rule would suggest that the current target range for the federal funds rate of 2% to 2.25% is roughly appropriate today and over the next three years. The Taylor rule is a model developed by Stanford economist John Taylor that central bankers use as one guidepost to help them gauge where they should set their key rate.
The modernized rule would reflect the fact that short-term real interest rates are significantly lower today than they were three decades ago, Bullard said. It also would account for significant changes in the Phillips curve, the model that predicts that a tighter labor market pushes up inflation.
Economists have debated why wage growth has not recovered to pre-crisis levels even as the U.S. unemployment rate continues dropping. Fed Chairman Jerome Powell has said the modest wage growth levels are "a bit of a puzzle" and said Oct. 3 that while the Phillips curve is still alive, it "might be resting."
While the Phillips curve was "relatively strong" in the 1970s and 1980s, a tighter labor market generates far less inflation today, Bullard said, which should prompt policymakers to adjust their economic models accordingly.