Our most data-driven FOMC member
James Bullard is perhaps the most data-driven member of the Fed, and thus one of my favorite FOMC members. His only agenda is getting policy right; he’s perfectly willing to shift his views as new data comes in. However in the past I’ve occasionally been critical of his attempts to second-guess the markets. This is from a post from 3 years back (beginning with a CNBC article):
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 being 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.
Yikes, that sounds too negative today, I certainly didn’t mean to suggest Bullard is a stupid ox; I just want him to behave like one. No, that doesn’t sound right either. Anyway, TravisV sent me to an article that makes me more hopeful about future Fed policy:
One of the U.S. Federal Reserve’s most prominent advocates of higher interest rates on Wednesday declared it “unwise” to move any further in light of weak inflation and global volatility, suggesting the Fed is stepping further away from plans to continue to hike rates.
St. Louis Fed President James Bullard argued steadily last year for the U.S. central bank to tighten policy and sounded alarms over the risk that continued low rates would create dangerous asset bubbles.
But on Wednesday he said the steady drop in U.S. inflation expectations is now his chief worry and said he will not be comfortable with further hikes until the trend reverses. . . .
Bullard is a voting member of the Fed’s rate-setting committee this year. . . .
“I regard it as unwise to continue a normalization strategy in an environment of declining market-based inflation expectations,” Bullard said. One other “pillar” of the Fed’s decision to hike rates in December has also weakened, he said, because falling equity prices and other tightened financial conditions have made the risk of asset bubbles “less of a concern.”
The Fed, he said, now has “more leeway” to take its time with rate hikes. Bullard said he in particular won’t be ready to move again until inflation-linked bonds signal that investors expect prices to rise at the Fed’s target 2 percent rate.
In a presentation to a group of financial analysts here, Bullard noted that the expected rate of inflation built into some bond prices has fallen as much as 50 percent since mid-2014. Bullard said he at first dismissed the slide as likely linked to the falling price of oil, but now views it as more endemic.
To hike rates in that situation, he said, would put the central bank’s credibility at risk because the Fed remains far from reaching its 2 percent inflation target, considered an important sign, alongside low unemployment, of the U.S. economy’s health.
“Central banks need to defend their credibility. That is why this is worrisome,” Bullard said. [Emphasis added]
The Fed taking its marching orders from the markets? Does that remind you of a small heterodox school of thought?
India pushes into Asia one inch at a time. But eventually you see that these incremental shifts have created the world’s highest mountains. The role of expectations seeps into macro a little bit at a time. How long before we wake up into a market monetarist world?
PS. I can’t believe I thought I could win friends and influence people with that sort of post back in 2013. Replace “stupid ox” with “a man so wise that he understands that nothing exceeds the wisdom of crowds.”
Update: TravisV pointed to this comment, from Bullard’s Powerpoint presentation:
Modern theory suggests that inflation expectations are a more important determinant of actual inflation than traditional “Phillips curve” effects.
Great stuff.
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18. February 2016 at 09:24
WTF? Sumner: “The Fed taking its marching orders from the markets? Does that remind you of a small heterodox school of thought?” – yes, Fisher Black, who thought money is neutral, said the Fed takes marching orders from the market. And that data show he is correct. For the 100th time, don’t be a stubborn ox, believe it when people say: money is (nearly) neutral. History has shown that again and again.
18. February 2016 at 09:30
Well, there’s winning friends and influencing people, and then there’s providing entertainment value. I’d rather you stuck with “Stupid ox with a ring in its nose”–it’s much more colorful!
18. February 2016 at 09:38
@Philo–but Sumner changed his tune perhaps since he was invited last year to lecture at the St. Louis Fed? Heck, if I offered him enough money to vouch that money is neutral, I’d not be surprised if Sumner did so, perhaps with weasel words along the lines of ‘money is neutral long term, but the long term is shorter than I thought before’. Ken Duda the inflationist also has Sumner in his back pocket. Luckily money is neutral except in hyperinflation so it’s unlikely Sumner’s positions will harm the USA even if adopted, unless we adopt a ‘continuously print money at all costs’ scheme, which Sumner btw has said he favors if NGDP does not respond to a limited print money campaign.
18. February 2016 at 09:42
Ray, Nice try, but I’ve never lectured at the St. Louis Fed. I lectured at the University of Missouri, St. Louis.
18. February 2016 at 09:49
Prof. Sumner,
Thanks! However, one major point you didn’t mention was that in his new PowerPoint, Bullard questioned the sacred Phillips curve:
https://www.stlouisfed.org/~/media/Files/PDFs/Bullard/remarks/Bullard-CFA-StLouis-17Feb2016.pdf
“Modern theory suggests that inflation expectations are a more important determinant of actual inflation than traditional “Phillips curve” effects.”
18. February 2016 at 10:04
One more supporter! Seems like he’s finally fully endorsing NGDP targeting.
http://www.bloomberg.com/news/articles/2016-02-18/summers-says-low-inflation-is-biggest-challenge-for-u-s
Unfortunately, the video seems to be cut off, but he’s quoted in the article:
“It’s worth thinking hard about whether the Fed should target nominal GDP,” Summers said. “If we had done that, we would have been even more concerned through the last five or six years about where we were, and it would have imparted a stimulative bias to policy.” … Clarifying that he doesn’t expect the Fed to switch to nominal GDP targeting immediately, he emphasized it should be considered.
Maybe I am too hopeful, but I think he could be the kind of person with enough influence to change the Fed’s target to NGDP if he were nominated the next Fed chair.
18. February 2016 at 10:13
Scott, have you discussed Larry Summers’ limited endorsement of NGDP targeting (“This could include setting targets for nominal GDP growth rather than inflation”) in the current issue of Foreign Affairs? See here:
http://larrysummers.com/2016/02/17/the-age-of-secular-stagnation/#more-6233
He goes on to argue that monetary policy cannot increase the neutral real interest rate, and that therefore fiscal stimulus is necessary. What is your take?
18. February 2016 at 11:33
“Modern theory suggests that inflation expectations are a more important determinant of actual inflation than traditional “Phillips curve” effects.”
If only the other members of the FOMC believed that. But they’d probably pretend that the nominal-TIPS spread was distorted and pick some ridiculous survey on expected inflation.
18. February 2016 at 11:36
Two interesting cases for Bernie Sanders written by smart authors:
http://www.interfluidity.com/v2/6400.html
https://niskanencenter.org/blog/thinking-through-your-libertarian-vote
I think the second one is more compelling but wrong. Personally, I’m rooting for Hillary. I think overall utility would be a lot lower if Bernie or any of the current Republican candidates win the Presidential election.
18. February 2016 at 12:10
Julius, Thanks, He has to hedge his bets a bit to keep himself politically acceptable if Hillary wins (which she will). But he clearly thinks it would have been better than IT.
18. February 2016 at 12:11
Travis, Thanks, I added an update.
18. February 2016 at 12:53
Ray:
How has history shown money to be neutral?
18. February 2016 at 12:55
Foosion
The survey they like best is of their own expectations. The average of the FOMC dots. It’s a nice, cosy, group-think kind of world.
18. February 2016 at 14:02
The Economist still hasn’t got it figured out, even though some of their bloggers are on the right track: http://www.economist.com/news/leaders/21693204-central-bankers-are-running-down-their-arsenal-other-options-exist-stimulate
18. February 2016 at 15:32
Prof. Sumner,
I found this old post where you included an excellent graph:
http://econlog.econlib.org/archives/2015/01/its_all_in_ec10.html
That is a great visual it really helps illustrate why forecasts for rapid inflation based on the “Phillips Curve” are misguided.
18. February 2016 at 16:05
Bullard recognizes the power of QE (printing money and monetizing debt).
The US is well below inflation targets and has feeble growth and much of the developed world is worse.
So why not $100 billion a month of QE?
Haruhiko Kuroda is only a phone call away.
18. February 2016 at 16:50
Scott, Bullard is too much like a windsock!
https://thefaintofheart.wordpress.com/2014/10/21/the-bullard-factor/
18. February 2016 at 17:36
Another on Bullard
https://thefaintofheart.wordpress.com/2015/12/07/not-surprising-that-bullard-is-surprised/
18. February 2016 at 19:01
Jason, That’s a horrible article.
Marcus. But that can be seen as a positive.
18. February 2016 at 21:50
Bloomberg interview where Summers endorses NGDP targeting:
http://www.bloomberg.com/news/videos/2016-02-18/summers-consider-if-fed-should-target-nominal-gdp
19. February 2016 at 08:06
Mankiw recommends this Trump analysis:
http://gregmankiw.blogspot.com/2016/02/the-zero-sum-worldview-of-mr-trump.html
19. February 2016 at 08:09
Great stuff by Bernanke! However, I wish he’d explored the fall in oil prices since 1/4/16 (which I think is overwhelmingly due to slowing aggregate demand)…..
“The relationship between stocks and oil prices”
http://www.brookings.edu/blogs/ben-bernanke/posts/2016/02/19-stocks-and-oil-prices
19. February 2016 at 08:12
Scott,
How would lower rates create “dangerous asset bubbles”? Wouldn’t higher rates have this effect as compared to lower rates?
Thanks, Tim
19. February 2016 at 09:17
Great new post by Kevin Erdmann:
http://idiosyncraticwhisk.blogspot.com/2016/02/housing-part-117-canary-had-it-coming.html
19. February 2016 at 10:41
Boys, I had interesting conversation with Stephen Williamson yesterday / today:
https://twitter.com/morganwarstler/status/700378016086491136?replies_view=true&cursor=AbBUjGQ-uAk
https://twitter.com/1954swilliamson/with_replies
I’m not sure I helped the cause, altho I was impressed he kept responding.
IMO, Scott would do well to switch some time over to Twitter, follow all the Fed guys and wheedle them into direct responses.
19. February 2016 at 15:39
Tim, I don’t believe low rates create bubbles.
19. February 2016 at 19:57
It’s always amusing to see Scott whine about how the govt. doesn’t “just” create an informationally efficient futures market. He sounds exactly like left-liberals who complain about the govt. not creating a welfare system that doesn’t have all of the usual defects and disincentives. But then again, Scott is a liberal so it isn’t too surprising.
20. February 2016 at 06:12
“Shmebulock, Crusher of Pussy”
Scott, I think you’d get a lot more out of twitter…
20. February 2016 at 06:21
Crusher, You are just the typical jerk who comes in here thinking they can beat me in a debate, gets handed his head on a platter, and then responds like a spoiled chld with juvenile insults. I’ve seen many before you, and it’s always the same act. I don’t delete the comments becasue I want people to understand what the other side is like, in case any of my supporters are thinking of jumping ship.
Morgan, I’m too long winded for Twitter.
20. February 2016 at 06:37
Wow Scott, you’re so noble, thinking of your “supporters” that way.
But tell us, do you have any actual, real-world experience with futures markets (or any market at all for that matter), or just academic musings?
20. February 2016 at 07:48
BTW Scott, by “supporters” you mean your idiot fan-boys, right?