MUNCIE, Indiana (Reuters) - Inaccurate Fed forecasts of growth, employment and inflation have pulled the central bank in conflicting directions, and driven the decision to keep rates low for so long, St. Louis Federal Reserve President James Bullard said on Monday.
Over the last year and a half the Fed has had a “hat trick” of forecast misses, Bullard noted, with a too-optimistic outlook for growth and a rebound of inflation to the Fed’s target, and a too pessimistic view of how fast unemployment would decline.
In setting policy, the misses on gross domestic product and inflation appeared to be given more weight, leading policymakers to keep rates near zero even as the economy neared full employment.
“The negative surprises with respect to real GDP growth and inflation carried more weight during this period than the positive surprises on labor market performance,” he said. Bullard, who acknowledged that his St. Louis Fed also missed on key points like an expected return of inflation this year, has pushed for a rate hike partly on the grounds that the economy was approaching full employment.
In a recent speech he acknowledged that some of the basic assumptions about the workings of inflation, for example, may be out of kilter with how the world is working in an era of slower growth.
An initial rate hike now appears likely to be approved when the Fed meets next week, a decision that would end seven years of near zero rates and begin the first rate tightening cycle in a decade.
At an economic policy lunch hosted by Ball State University, Bullard said the inaccuracy of Fed forecasts has created a “long-standing problem” because policymakers have to continually shift their view of the proper rate path to adapt to the gap between their expectations and the outcome.
That tension could figure directly into what is likely to be an intense debate in the coming year over how fast or slow to raise rates once the initial “liftoff” decision has been made.
Reporting by Howard Schneider; Editing by Andrea Ricci