AMELIA ISLAND, Fla. May 8 Continued strong
demand for safe assets along with sluggish growth in the U.S.
workforce will hold down U.S. interest rates for the foreseeable
future and means the Fed does not have to continue the steady
series of rate hikes it is planning.
Bullard last year switched his view of the economy after
concluding the U.S. was in a low-inflation, low-growth "regime"
that was unlikely to change soon. The proper Fed policy rate for
that situation, he concluded, was less than one percent - about
where the rate is now following the Fed's most recent rate rise
The situation is also characterized by a decline in the
"natural" rate of interest - an abstract concept that Fed
officials estimate as a rate that would neither encourage or
discourage economic activity. In remarks at an Atlanta Federal
Reserve bank conference, Bullard said he found in a recent study
that much of that decline could be attributed to strong demand
for safe assets like U.S. Treasury securities.
He did not offer a reason for why demand for those assets
has been so strong since the turn of the century, but the idea
is similar to that of former Fed chair Ben Bernanke and others
who have looked at the implications of a "global savings glut."
For the Fed, Bullard said, the fact that safe asset demand
remains strong, along with the fact that growth in the labor
force and labor productivity remain weak, means there is no need
to rush into rate hikes.
"The natural rate of interest, and hence the appropriate
policy rate, is low and unlikely to change very much," said
Bullard. With unemployment low and inflation near target, he
said, the Fed has arguably achieved its goals with a policy rate
set at between 0.75 and 1.0 percent.
"The policy rate is approximately at an appropriate setting
today," he said.
(Reporting by Howard Schneider; Editing by Chizu Nomiyama)