St. Louis Fed President James Bullard put the 'sufficiently restrictive zone' for the fed-funds rate at between 5% and 7%, up from the current range of between 3.75% to 4%, according to a chart he presented.
That chart was presented by St. Louis Fed President James Bullard as part of a presentation in Louisville, Ky., and it shows where he sees “the sufficiently restrictive zone” for the central bank’s main policy rate target. Bullard put the zone somewhere between 5% to 7%, up from the current fed-funds rate range of between 3.75% to 4%.
Bullard’s zone was based on estimated policy levels recommended by Taylor-type rules, one with generous assumptions and the other with less-generous assumptions. The “Taylor rule” is a widely accepted equation, or what former Fed Chairman Ben Bernanke described as “a rule of thumb,” developed by economist John Taylor of Stanford University for where the central bank’s policy rate ought to be relative to the state of the economy.
Variations of the Taylor rule can produce different results depending on the numbers being used, and the upper range of Bullard’s zone is much higher than what traders and investors currently envision. As of Thursday, fed-funds futures traders, for example, were nudging up their expectations for a 5%-plus fed-funds rate next year, but not yet pricing in a significant chance of a 6% policy rate.
After Bullard’s presentation Thursday morning, U.S. stocks DJIA, -0.10% SPX, -0.57% dropped, led by a 1% drop in the S&P 500 index. The ICE U.S. Dollar Index DXY, +0.76% rose almost 0.8%. Treasury yields jumped, with the exception of the 1- through 3-month rates — pushing the policy-sensitive 2-year rate TMUBMUSD02Y, 4.466% up to 4.47% and the benchmark 10-year rate TMUBMUSD10Y, 3.770% to 3.79%.
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