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In "Permazero", Fed's Bullard Admits US May Be Entering Permanent Period Of Lower Inflation And Interest Rates

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:

  • US ECONOMY NOW QUITE CLOSE TO NORMAL

And on the other:

  • WANTS TO RETURN TO '84-'07 MACROECONOMIC EQUILIBRIUM; NO REASON TO CONT EXPERIMENTING W/EXTREME POL SETTING

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