Fed's Bullard Shifts Forecasting Model, Expects Little Additional Tightening


Federal Reserve Bank of St. Louis President James Bullard said Friday it was his bank that declined to provide long-run forecasts to the central bank's quarterly official outlook due a fundamental shift in how he views the economic outlook.

The new outlook assumes very little in the way of additional Fed rate rises, the official noted.

Mr. Bullard, in a highly technical statement, explained that rather than predicting where the economy and Fed interest rate policy is likely to go over the long run, his bank will now assume that there are different and sometimes changing states the economy can exist in. Whatever that state is will determine the outlook of the St. Louis Fed. Mr. Bullard's statement also seems to suggest he agrees with those who have argued the U.S. has slid into a low growth state of affairs known as secular stagnation.

"We are backing off the idea that we have dogmatic certainty about where the U.S. economy is headed in the medium and longer run," Mr. Bullard said. "We are trying to replace that certainty with a manageable expression of the uncertainty surrounding medium- and longer-run outcomes."

In the current case, Mr. Bullard said his bank believes the U.S. is in a low growth, low real interest rate world with no apparent threat of recession. Given the assumption of this statement, Mr. Bullard predicts growth of about 2% over the next two and half years, with the unemployment rate holding at 4.7% and inflation ticking up to about 2% as measured by an unspecified trimmed mean index.

This outlook argues for an "essentially flat" path for Fed interest rate policy, Mr. Bullard said, although he allowed there remains "upside risk" to forecasts for the economy and monetary policy.

In his statement Mr. Bullard didn't say anything specific about the timing of rate rises. But he did explain the outlook holds for a policy rate of 0.63% over the next two and half years. That compares with the Fed's current target range of 0.25% to 0.50%. It suggests that it is Mr. Bullard who is the official who argued in the official forecasts the Fed has but a single rate rise ahead of it.

"We view the current low real rate regime as very persistent, and so for purposes of forecasting, we simply assume we will remain in the low real rate regime through the forecast horizon," Mr. Bullard said.

In the bank's new way of looking at the economy, "The economy does not necessarily converge to a single steady state, but instead may visit many possible regimes," Mr. Bullard wrote. "Regimes can be persistent, as we think the current one may be. The timing of a switch to an alternative regime is viewed as not forecastable, and so we simply forecast that the current regime will persist," he said.

Mr. Bullard's statement clears up one of the mysteries about the central bank's interest-rate setting Federal Open Market Committee meeting this week. The Fed declined to raise rates this week citing uncertainty about the outlook. Its official Summary of Economic Projections, which is done quarterly, still eyes additional rate rises, but there is wide uncertainty the Fed will be able to deliver those increases in borrowing costs amid some evidence the job market may be slowing.

The Fed's forecasts showed that one bank didn't submit long-term forecasts for variables like growth, inflation and Fed interest rate policy. Some had suspected this might be the St. Louis Fed.

Mr. Bullard has become a vocal opponent of aspects of the Fed's official forecasts, and has argued scraping the so-called "dot plot" which charts individual officials' outlook for rate policy. He's argued the outlook of that forecast has come to be viewed as a near commitment to act, which is at odds with the data-dependent policy officials are trying to implement.

Write to Michael S. Derby at michael.derby@wsj.com