FOUR times a year the meeting of the Federal Open Market Committee, the Federal Reserve board that sets monetary policy, concludes with a special flourish: a press conference, and the publication of the members’ economic projections. The latter includes a “dot plot” which shows how members think rates will unfold over the next few years. When the new dots were released at the end of the June meeting, on the 15th, it quickly became clear that one was not like the others. FOMC members overwhelmingly see the Fed’s main interest rate rising to between 1% and 2% in 2017, then on to between 2% and 3% in 2018: all of them, that is, except one. That oddball member projected the interest rate would stay right about where it is now over the next two years. When the projections dropped, Fed watchers immediately speculated about just which member had turned super-dovish (or super pessimistic). Two days later, all was revealed. The anomalous dots belonged to James Bullard, the president of the Federal Reserve Bank of St Louis, and traditionally a bit of a hawk. But Mr Bullard’s dots represent something more interesting than a simple shift in the outlook for the economy. As he made clear in two statements published on June 17th, his whole way of thinking about monetary policy in the economy has changed.

Mr Bullard begins by noting that the Fed seems to have more or less succeeded in achieving its mandates. The unemployment rate, at 4.7%, is about as low as it ever gets. Meanwhile, inflation is close to returning to the Fed’s 2% target. Growth is plodding along in steady fashion. And yet this is all occurring against a policy backdrop that remains wildly out of the ordinary, at least by pre-crisis standards. The Fed’s main interest rate is barely above zero (and has plumbed such depths for the last eight years). The Fed’s balance sheet remains at the enormous size to which it grew during multiple quantitative-easing operations. And the Fed is promising to raise rates only very, very gradually. Monetary policy, as the central bank constantly insists, is highly accommodative. And yet the economy is behaving like it is coasting along the gentlest of downward slopes.

Daily chart: Explaining the Federal Reserve’s “Dot Plots” One could interpret this puzzling outcome in a few ways. Mr Bullard sees it as evidence that the economy does not converge toward some steady state, “normal” condition, in which interest rates sit at a comfortable 4% or so. The idea that eventually the natural processes of the economy will support “lift off” and “normalisation” is wrong, he thinks. Instead, there are many stable regimes in which an economy can land, he reckons, and which can be stable until some shock comes along to push it out. Right now, the American economy is in a low growth, low inflation, low interest-rate regime. It has been stuck there for years, even as the Fed’s published projections suggest that a rise back to “normal” rates is just over the horizon. Mr Bullard is effectively saying: let’s dispense with that fantasy. The willingness to take a hard look at this experience and ask whether the Fed hasn’t gotten something wrong is certainly commendable. But “things seem to stay as they are until disturbed” needs more fleshing out to work as a theory of monetary policy. Mr Bullard offers two broad stories about his regime-based view of the economy, with quite different implications. The first, described as the St Louis Fed’s new characterisation of the economy, is here. In it, Mr Bullard says that there can be multiple productivity regimes—low and high, for instance, corresponding to slower or faster trend growth—but that the Fed has no way to predict when a move from one to another will occur (and should not try to in making its projections). There can also be multiple real interest rate regimes, based on things like the supply and demand for capital and the liquidity premium on safe assets. The interest-rate regime also seems to be persistent, with switches that can’t easily be predicted. For the economy to look wildly different from its current state, one of those two factors, productivity and real interest rates, would need to flip to some new regime. But they probably won’t, Mr Bullard says, and so the economy probably won’t look wildly different.

That story is interesting, but not especially monetary. Reading it one suspects there are more things going on in the background. And there might well be. In another piece published this month, Mr Bullard posits a very different sort of regime-based world. It is one that is rooted in the “Neo-Fisherian” ideas (so called because of their relation to the work of Irving Fisher) recently developed by John Cochrane, of the University of Chicago. Neo-Fisherians make a pretty simple point: nominal interest rates in an economy are a function of both the underlying real interest rate and the expected rate of inflation. The real interest rate is determined by markets and will converge over time to some natural rate. That implies that if a central bank sets a particular nominal interest rate, the long-run inflation rate is necessarily pinned down. And that, in turn, implies that if central banks raise interest rates dramatically, that will eventually and inevitably lead to high inflation.

One way of looking at recent macroeconomic experience, suggests Mr Bullard, is that the Fed has been targeting a near-zero interest rate. With the nominal interest rate effectively pegged at zero, inflation was inevitably going to settle into a lower regime. It has done so. While it remains in that regime, Mr Bullard says, long-run real economic growth will mostly depend on fundamentals—that is, on the productivity regime. Meanwhile, most central banks will find themselves needed to rely on quantative easing to address any future shocks to demand.

This is all very interesting, but I think the conclusions Mr Bullard draws are a little off. Start, though, with where he is correct. The Fed cannot predict changes in productivity, and neither can monetary policy affect long-run real economic growth. It wouldn’t make sense for the Fed to target real GDP growth, but then, the Fed is not really in that business. The Fed is also unable to control the long-run real interest rate, which is a function of global saving and investment. What’s more, it does seem clear that the global real interest rate has settled down to a level of approximately zero.

But does it follow that the Fed should then either 1) set a high nominal interest rate in order to achieve higher inflation, or 2) keep its interest rate low and accept low inflation? I don’t believe so.

Where I think Mr Bullard begins to go off course is in treating the Fed’s behaviour like a zero-interest-rate peg. Yes, interest rates have been below 0.5% for nearly eight years, and the Fed has consistently promised to raise rates gradually. But it has promised to raise rates gradually, which is not the sort of thing a zero-rate targeting central bank would do. More importantly, markets have believed that the Fed would raise rates. When the fed fund futures contract for July 2016 began trading back in 2013, markets reckoned that the interest rate set at the July meeting would be in the neighbourhood of 1.5% to 2%. That was in line with the dots published by the Fed at the time. The Fed told markets that rates were going up, and markets saw no reason to disbelieve.

As it turned out, both markets and the Fed were far too optimistic; over time the expected path of rate hikes has been both pushed forward into the future and it has flattened. Markets now think that the fed fund rate will be no higher than 1% three years hence. Maybe this shift has occurred because the Fed has signalled more strongly that it is pursuing a zero-rate peg, but I doubt it; in every published projection since 2013, the dots have continued to rise up to some “normal” rate well above zero.

I would argue that Mr Bullard is wrong; it is not the case that the Fed is choosing low rates and inflation expectations are therefore converging toward a low level. I would argue that the Fed has been targeting very low inflation, and falling inflation expectations imply much lower interest rates in future.

This dynamic is there back in 2013. In its projections the Fed indicates that rates will rise steadily, even as it projects that inflation will be extraordinarily low, just over 1% in 2013, converging, finally, toward 2% by the end of 2015. Essentially every set of Fed projections since then has shown the same thing. It allowed its QE programmes to end despite too-low inflation, and it raise its interest rate in December despite too-low inflation. The Fed has signalled very strongly that markets should expect inflation to remain at very low levels, indeed, below target. It would be shocking if inflation expectations hadn’t trended inevitably downward.

Now return to the Fisher equation. If the global real interest rate is in the neighbourhood of 0% and expected inflation is in the neighbourhood of 1%, that suggests the Fed will have an extremely difficult time raising nominal interest rates beyond 1%. Mr Bullard has the regime right, but the causation wrong. The Fed has driven the economy into this rut in its determination to keep inflation low.

Is there a route out? Ironically, Mr Bullard’s low dots might provide a path. Where in the past the Fed has promised to raise rates even as inflation stays low, it could instead promise to keep them low no matter what, even if, and indeed until, inflation rises above the target. If the Fed wants higher nominal rates in a world of low real rates, it must cultivate higher inflation.

What is needed most, though, is for the Fed to remember that job one is to coordinate the market’s expectations. Mr Bullard gets one very important thing absolutely right: there is no normal nominal rate to which the economy is bound to converge. The Fed can choose whether nominal rates get stuck near zero or rise to a higher, safer level. Right now, unfortunately, it is steering the American economy firmly into a low-rate rut.