That’s not your job Mr. Bullard

Here’s James Bullard:

The Federal Reserve’s “very aggressive” easy money policy is going to stay that way for a “long time,” St. Louis Fed President James Bullard told CNBC on Friday.

“This is a monetary policy that packs a punch,” said Bullard, who’s a voting member on the Federal Open Market Committee (FOMC).

Uncertainty about the future of the central bank’s bond buying program has weighed on the stock market in recent days.

But the St. Louis Fed president said in Friday’s “Squawk Box” interview, “I think policy is much easier than it was last year because the outright purchases are more potent tool than the ‘Twist’ program was …

Yes, but only because Twist was very weak.

. . . I don’t think markets have fully absorbed that switch.”

That’s not Bullard’s job.  He hasn’t been hired to outguess the markets.  If he wants to do that he should go run a hedge fund.  His job is to be led around by the markets like a stupid ox with a steel nose ring is dragged along by a farmer.

For the year, Bullard predicted gross domestic product (GDP) growth at 3.0 percent.

It’s not going to happen.  Ironically one of the reasons it’s not going to happen is because James Bullard thinks it is going to happen.

For the 100th time: No subsidized NGDP futures market = criminal negligence.

PS.  Nickik asked the following question:

I agree that NGDPLT may not be appropriate for small and/or emerging economies that are relatively undiversified.

I’m from Switzerland and while its not a emerging economy it’s small. What kind of policy would you advocate for a country like that?

[Update: I misquoted Nickik, the first sentence there is him quoting me.]

I haven’t studied Switzerland, but if they don’t want to use NGDP, then might consider targeting total wage and salary income.  I prefer that aggregate targets such as NGDP or national income be done on a per capita basis, or per working age adult (although I often omit that fact to save time.)

If they want to stick with inflation targeting, I’d suggest:

1.  Use an index that includes only domestically produced goods.

2.  Use an index that nets out all sales/VAT/excise taxes.

3.  Do level targeting.

I think that sort of price index would work fine for Switzerland.


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18 Responses to “That’s not your job Mr. Bullard”

  1. Gravatar of Geoff Geoff
    22. February 2013 at 10:37

    “His job is to be led around by the markets like a stupid ox with a steel nose ring is dragged along by a farmer.”

    Now that’s funny.

  2. Gravatar of Geoff Geoff
    22. February 2013 at 10:38

    Dr. Sumner:

    “For the 100th time: No subsidized NGDP futures market = criminal negligence.”

    Please explain how futures prices that do not change by definition can convey the information needed to make judgments as to market expectations of NGDP.

  3. Gravatar of PJ PJ
    22. February 2013 at 10:45

    Scott you’ve had some excellent one liners recently. The one quoted by Geoff above is fantastic. I also like:

    “Ironically one of the reasons it’s not going to happen is because James Bullard thinks it is going to happen.”

    If you understand that, you understand monetary policy.

  4. Gravatar of nickik nickik
    22. February 2013 at 11:12

    Hi Scott,

    Thanks for you answer but I think you should make clear that the top part of what I wrote was a quote from you, not from me.

    I dont know, thats why I asked.

    Would you rather use NGDPLT or the kind of inflation you just advocatet?

  5. Gravatar of Anonymous Anonymous
    22. February 2013 at 11:27

    Hello,

    I am sure you’ve explained what I am about to ask many times, but I’ve been following your site for a while and haven’t read an explanation, and I also could not find it on the web.
    What would be the problem with the Central Bank just buying back bonds from the market? Wouldn’t that pretty much assure inflation?

  6. Gravatar of GMC GMC
    22. February 2013 at 11:32

    I agree with the above, but Tyler Cowen made a point today which I think deserves further comment:

    “Everything we were taught about the monetary base is wrong in a world with interest on reserves (IOR). A large base can sit there forever. The price level is not proportional to the base, changes in the base, etc. It just isn’t. The broader aggregates, such as M2, haven’t grown so rapidly.”

    This has been my concern for some time, as well. To what extent are the open market operations currently underway and having occurred since 2008 hamstrung by the ongoing IOR policy, and why hasn’t the IOR policy received more criticism, especially from MMTers?

    IOR seems to be a cute way of clandestinely providing seignorage revenue to private banks in order to recapitalize them. But it is also a drag on loosening monetary policy; is the balance sheet of the Fed really not a good indicator of monetary policy?

    Is IOR the reason why?

    A reason, if not the reason?

  7. Gravatar of ssumner ssumner
    22. February 2013 at 11:41

    Geoff, They can change by definition, but not by construction. They tell the Fed what setting of the monetary base is expected to lead to on-target NGDP. However my comment here did not assume such a market. I’d favor an NGDP market being created and subsidized even if the Fed didn’t peg its price.

    PJ, Thanks, it makes my day when someone notices something that also appeals to me. I like the second quote you mention, although I suppose the ox quote is more immediately amusing.

    Nickik, Sorry, I’ll change that.

    Anonymous, It’s more effective if accompanied by an explicit target.

    GMC, My very first blog post criticized IOR–and I’ve done so at least 50 times since.

    So I agree with you, although the Fed could do much better even with IOR.

  8. Gravatar of marcus nunes marcus nunes
    22. February 2013 at 12:21

    It´s even worse in Europe where the likes of Mr Rehn have ‘veto’ power!
    http://thefaintofheart.wordpress.com/2013/02/22/when-you-live-in-la-la-land-anythings-possible/

  9. Gravatar of That’s not your job Mr. Bullard | Fifth Estate That’s not your job Mr. Bullard | Fifth Estate
    22. February 2013 at 12:32

    [...] See full story on themoneyillusion.com [...]

  10. Gravatar of Geoff Geoff
    22. February 2013 at 12:41

    Dr. Sumner:

    “Geoff, They can change by definition, but not by construction. They tell the Fed what setting of the monetary base is expected to lead to on-target NGDP. However my comment here did not assume such a market. I’d favor an NGDP market being created and subsidized even if the Fed didn’t peg its price.”

    Can you explain how NGDP futures prices that don’t change by construction can convey the information needed to make judgments as to market expectations of NGDP?

  11. Gravatar of TravisV TravisV
    22. February 2013 at 13:38

    Matt O’Brien ‘nails it’

    http://thefaintofheart.wordpress.com/2013/02/22/matt-obrien-nails-it

  12. Gravatar of Steve Steve
    22. February 2013 at 15:34

    “His job is to be led around by the markets like a stupid ox with a steel nose ring is dragged along by a farmer.”

    If you hired a cartoonist to illustrate this, the whole world would learn about theMoneyIllusion and market monetarism.

  13. Gravatar of Doug M Doug M
    22. February 2013 at 15:41

    “His job is to be led around by the markets like a stupid ox with a steel nose ring is dragged along by a farmer.”

    I would guess that most poeple would flip that model around… that the Fed is supposed to be the shepherds to a market market that frequently doesn’t want to be hearded.

    If the Fed is supposed to just follow the market, then does the Fed need to be there at all? Why can’t the market determine the money supply?

    “For the 100th time: No subsidized NGDP futures market = criminal negligence.”

    Please tell us how to structure a subsidized decisions market where the noise of the subsidy doesn’t overwhelm the signal of the market?

    GMC,

    You are right on. So long as the Fed is paying interest on reserves it is undermining the effectiveness of its buying programs.

  14. Gravatar of dtoh dtoh
    23. February 2013 at 08:20

    Scott,
    NGDP futures is not a great idea. You keep talking about a subsidized market. If there are an insufficient number of buyers or sellers, no amount of subsidization will work.

    Start off with indexed notes like TIPs. Call them GAINS (“Growth Adjusted Index Notes”). The Fed can issue them in exchange for Treasuries after every Treasure auction. Incredibly easy. With the Fed issuing them, you have an automatic market.

    Stop talking about futures. Indexed notes are the way to go.

    I hope I don’t have to keep saying this.

  15. Gravatar of ssumner ssumner
    23. February 2013 at 09:02

    Marcus, I agree.

    Geoff, I have a paper coming out soon that explains the whole thing—or you can look at my 2006 “Contributions to Macroeconomics” paper called “Let a Thousand Models Bloom”.

    Doug, You said;

    “Why can’t the market determine the money supply?”

    Bingo!

    dtoh, You said;

    If there are an insufficient number of buyers or sellers, no amount of subsidization will work.”

    Good. If I am the only participant then I get to pocket the entire million dollar subsidy myself. Obviously I’m not that lucky, as there would be plenty of participants. I don’t like using indexed bonds, because spreads are distorted by liquidity considerations.

    You said;

    I hope I don’t have to keep saying this.”

    I’m afraid you will. :)

  16. Gravatar of dtoh dtoh
    23. February 2013 at 09:12

    Scott,
    If the Fed issues the indexed bonds (in exchange for Treasuries) and makes a market, there are not going to be any liquidity issues.

    Plus if there is a market for indexed bonds, the exchanges will create futures. Getting a futures market going from scratch is a lot tougher than issuing some kind of indexed bond. (I know from experience, I’ve been involved in both.)

  17. Gravatar of ssumner ssumner
    24. February 2013 at 08:33

    dtoh, There’s a very liquid market for TIPS, and yet there are still huge liquidity issues that distort prices during periods of market stress. So I’m much less confident than you are. It’s also not clear how the Fed would “make a market” in those assets.

    In contrast, it’s easy to set up and subsidize a prediction market.

  18. Gravatar of Geoff Geoff
    24. February 2013 at 10:17

    Dr. Sumner:

    “Geoff, I have a paper coming out soon that explains the whole thing—or you can look at my 2006 “Contributions to Macroeconomics” paper called “Let a Thousand Models Bloom”.”

    I’ve read that paper, and I didn’t see an explanation of how practice fixed futures prices can communicate market expectations of NGDP.

    I’ve read your NGDP futures focused blog posts as well, and no luck there either.

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