Federal Reserve Bank of St. Louis President James Bullard spoke last week in Little Rock about "The U.S. Economy Three Months into 2018" at the Arkansas Bankers Association's and Arkansas State Bank Department's Day with the Commissioner.
According to a news release, Bullard said the U.S. and other large economies had better-than-expected growth in 2017, which fed into the profits of U.S. multinationals and helped U.S. equity prices rally last year.
U.S. real GDP growth in 2017 was 0.4 percentage points higher than what the International Monetary Fund projected in October 2016.
But effects from the surprise in growth have stalled this year, Bullard said. He said the growth rate of U.S. real GDP looks uncertain in the first quarter, possibly due to residual seasonal effects; markets are trying to discern the direction of U.S. trade policy; U.S. interest rates are higher; and markets are contemplating possible tech sector regulation.
Bullard also said, while inflation remains low, it is expected to move somewhat higher during 2018.
He attributed low inflation readings in 2017 to relatively good labor market performance and a still historically low policy rate.
"Special factors are expected to drop out of the year-over-year comparisons soon, likely suggesting that inflation is somewhat closer to target," he said.
Bullard also said yield curve inversion remains a possibility later this year, and that monetary policy is close to neutral today, which is appropriate for the current macroeconomic situation.
Bullard talked about the flattening of the U.S. nominal yield curve since 2014 and called it the result of short-term rates rising while long-term rates have remained relatively stable.
"It is possible that the nominal yield curve will invert sometime in the next year, but recently the 10-year yield has increased enough to keep pace with the [Federal Open Market Committee's] rate increases," Bullard said in the news release.
Speaking about policy, he said the FOMC has begun to gradually reduce the size of the Fed's balance sheet, the range for the policy rate has been increased gradually, and it is currently 1.50 to 1.75 percent.
Bullard explained that the neutral setting for the policy rate puts neither upward nor downward pressure on inflation, given everything else that is occurring in the economy.
"This is appropriate for the current situation, in which inflation is not far below target and is expected to rise," he said in the release, adding that "it is not necessary in this circumstance to raise the policy rate further in order to put downward pressure on inflation, since inflation is already below target."