May 8, 2017 / 12:37 PM / in 7 months

St. Louis Fed's Bullard says demand for safe assets holding rates low

AMELIA ISLAND, Fla., May 8 (Reuters) - Continued strong demand for safe assets along with sluggish growth in the U.S. workforce will hold down U.S. interest rates for the foreseeable future and means the Fed does not have to continue the steady series of rate hikes it is planning.

Bullard last year switched his view of the economy after concluding the U.S. was in a low-inflation, low-growth “regime” that was unlikely to change soon. The proper Fed policy rate for that situation, he concluded, was less than one percent - about where the rate is now following the Fed’s most recent rate rise in March.

The situation is also characterized by a decline in the “natural” rate of interest - an abstract concept that Fed officials estimate as a rate that would neither encourage or discourage economic activity. In remarks at an Atlanta Federal Reserve bank conference, Bullard said he found in a recent study that much of that decline could be attributed to strong demand for safe assets like U.S. Treasury securities.

He did not offer a reason for why demand for those assets has been so strong since the turn of the century, but the idea is similar to that of former Fed chair Ben Bernanke and others who have looked at the implications of a “global savings glut.”

For the Fed, Bullard said, the fact that safe asset demand remains strong, along with the fact that growth in the labor force and labor productivity remain weak, means there is no need to rush into rate hikes.

“The natural rate of interest, and hence the appropriate policy rate, is low and unlikely to change very much,” said Bullard. With unemployment low and inflation near target, he said, the Fed has arguably achieved its goals with a policy rate set at between 0.75 and 1.0 percent.

“The policy rate is approximately at an appropriate setting today,” he said. (Reporting by Howard Schneider; Editing by Chizu Nomiyama)

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