On Monday 10 April, ACFS hosted an International Distinguished Lecture at the RACV Club, featuring James Bullard, President and CEO of the Federal Reserve Bank of St Louis. Mr. Bullard presented on the topic ‘US Macroeconomic Outlook’, using his perception of the US economy to explain his outlook for the US monetary policy.
Mr. Bullard highlighted the US economy’s convergence to a “low-growth, low-safe-real-interest-rate regime”, referring to the US’ recently slowing pace of real GDP growth, labor market improvement and productivity growth in his examination of this. More specifically, it was noted that considering the minimal variation in GDP growth over the last two years, coupled with an average GDP of 2.1% over that least seven years and sub-2% tracking estimates for growth in the first quarter of 2017, it was very unlikely that any drastic change in this GDP would be seen this year.
James Bullard delivering the 2017 ACFS International Distinguished Lecture.
Labor market improvement has also recently plateaued, with a slowing in the unemployment rate decline since September 2015, and reductions in both nonfarm payroll employment growth and private hours growth (2.3% and 3.4% respectively in February 2015, as compared to 1.5% and 1.4% respectively today). Also addressed was a recently low US productivity growth, considering medium and longer term economic growth in the US is driven by trends in productivity, as well as labor force. Mr. Bullard contended that an average growth rate of only 0.4% in labor productivity since early 2013 (low when compared to an average of 2.3% per annum for the period of 1995-2005), has played a significant role in inhibiting more rapid economic growth, and consequently, that “faster productivity growth is the surest path to more rapid real GDP growth in the US”.
It was highlighted that much like GDP, US inflation has experienced minimal variation in recent years, with Mr. Bullard citing the Dallas Fed trimmed-mean inflation rate, headline inflation and several other measures, which all point to an inflation rate of near 2%, and indicate that although inflation expectations have been rising, they are still somewhat low. “Inflation has essentially returned to 2% and is expected to remain there”. Mr. Bullard also examined the regime of low real rates of return on short-term government paper. As well as now being a global phenomenon, this regime that has been developing over decades, and is likely to remain in place for years to come, thereby making it “unwise to rely on mean reversion to predict that the forces driving safe real rates to such low levels are likely to reverse anytime soon”. He explained that “this then feeds through to the [Fed’s] policy rate, which is also likely to remain low”.
This unwillingness to assume mean reversion in the rate of productivity growth or in the real rate of return on short-term government paper, is what leads to the St. Louis Fed’s forecast of a relatively flat policy rate in the following few years. This is in contrast to the Federal Open Market Committee (FOMC) which assumes mean reversion and produces a higher projected policy rate over the coming few years.
Mr. Bullard also considered whether or not new fiscal and regulatory policies could move the US into a higher-growth regime. Deregulation, infrastructure spending and tax reform were all noted as potential enablers of improved productivity growth, and consequently, an increased pace of real GDP growth, however it was also noted that the Fed could afford to take a wait-and-see posture regarding the development of these new policies.
Considering the recent policy rate increase, Mr. Bullard mentioned that the FOMC may now be better equipped to passively running down the size of the balance sheet, as a means of normalizing Fed policy.
Mr. Bullard declared that the cessation of balance sheet reinvestment could lead to a more natural adjustment of rates across the yield curve as normalization proceeds. “We should be allowing the balance sheet to normalize naturally now, during relatively good times, in case we are forced to resort to balance sheet policy in a future downturn.”
The ACFS International Distinguished Lecture Series provides thought leadership to the Australian finance and business communities on matters of contemporary global importance.
The Series has hosted key international leaders such as:
- Dr. Mervyn King, Governor of The Bank of England, Through the Looking Glass: Reform of the International Institutions
- Dr. Robert Joss, Dean of Stanford Business School and former CEO of Westpac Banking Corporation, Modern Finance and Its Leadership Challenges
- Mr John Fraser, Chairman and CEO of UBS Global Asset Management, A Tumultuous Year or so. Some Observations on the Turmoil in the Financial Markets, Policy Settings and Regulatory Implications
- Mr Jaime Caruana, General Manager, Bank for International Settlements, Grappling with Systemic Risk
- Mr David Murray, Chairman of the Financial System Inquiry, The Importance of a Strong Financial System
- Mr Simon McKeon, Chairman of Monash University, A New Paradigm for Ageing in Australia