Fed Admits US May Be Entering Permanent Period Of Lower Inflation And Interest Rates


By Paul H, Lenox Home Loans
In the first of 6 Fed speaker scheduled today, St. Louis Fed’s Bullard did what Fed presidents usually do: issued the usual tripe of contradictory statements.
On one hand he said that:
And on the other:
Adding that the Fed “may need to alter some fundamental assumptions about how Fed policy works if U.S. stays in persistent state of low nominal rates, low inflation.” Like what – hiking rates? Or cutting rates to negative?
So “close to normal”if one excludes the 7 years of ZIRP and the $2.6 trillion in excess reserves. And all it would take to return to 3.5% GDP growth is unwinding $13 trillion in artificial central bank supports of a global economy that would otherwise be in a depression.
Good luck.
But the most important thing Bullard said in his speech titled “Permazero” is that the the US may be entering a permanent period of lower inflation and interest rates. Wait, wasn’t ZIRP and QE supposed to push the US economy, boost inflation and hike rates?
Good to know 7 years later that the biggest monetary experiment in history did precisely the opposite of what it was supposed to achieve.
Other highlights courtesy of Bloomberg:

  • he reiterated his support for liftoff, sees interest rate peg developing, mentions prospect that U.S. may be permanently stuck at near zero rates.
  • tge U.S. economy is “quite close to normal today,” Bullard said Thursday in text of speech in Washington, titled “Permazero”
  • 5% unemployment rate is “statistically indistinguishable” from FOMC’s view of equilibrium long-run jobless rate; inflation, based on Dallas Fed’s trimmed mean rate, is at 1.7% or just below Fed’s 2% target
  • “Simple and prudent approach” to current policy settings is to move closer to normal levels; “no reason to continue to experiment with extreme policy settings”
  • May be situation in which policy rate, inflation rate remain low either because liftoff doesn’t occur or future negative shocks force a return to zero rates
  • Stable interest rate peg is a “realistic theoretical possibility”
  • May need to alter some fundamental assumptions about how Fed policy works if U.S. stays in “persistent” state of low nominal rates, low inflation
  • Post-crisis U.S. monetary policy can be interpreted as an interest rate peg since rate has stayed near zero for almost 7 yrs
  • Almost 7 yrs at zero lower bound is “well beyond” ordinary business cycle time
  • Low nominal rate peg, far from being harbinger of runaway inflation, would dictate medium- and longer-run low inflation outcomes
  • FOMC is already committed to very low nominal rate over next 2-3 yrs
    And the punchline: “Realistic” possibility that G-7 monetary policy will spend more time at or near zero rates in coming years

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