It’s Bullard

James Bullard has always been one of my favorite Fed Presidents, and that’s even more true after his recent comments on monetary policy:

The U.S. economy may only need one rate hike for as long as 2-1/2 years and the Federal Reserve is eroding its credibility by indicating otherwise, St. Louis Fed President James Bullard said on Friday in arguing for an overhaul of how the central bank views and discusses policy.

Bullard called for the Fed to discard its practice of projecting long-run values for things like economic growth and the target policy rate, acknowledge it has little certainty about the future, and state that the economy is not likely to get much worse or much better than it is now, absent some outside shock.

Bullard said he felt the appropriate federal funds rate is around 0.63 percent, roughly a quarter point above where it stands, and will likely stay there “for the foreseeable future.” For the Fed to publish projections that it will rise steadily to historic norms of three or four percent has been misleading.

The Fed’s “dot plot” of projected interest rate policy “appears to be too steep. Fed funds futures markets do not seem to believe it. They are priced for a much shallower pace of increases,” Bullard said.

“The Fed’s actual pace of rate increases has been much slower than what was mapped out by the committee in the past. This mismatch between what we are saying and what we are doing is arguably causing distortions in global financial markets, causing unnecessary confusion over future Fed policy, and eroding credibility of the (Federal Open Market Committee),” he said.

Exactly.

While that would seem to make the former inflation hawk now the Fed’s most dovish member, those labels would not apply as easily under Bullard’s way of thinking. Rather than see the economy on a continuum, with the interest rate used to moderate a tradeoff between unemployment and inflation, he said the Fed should instead view the economy as in a “regime.” The appropriate policy rate for that state would remain in place until a recession, productivity surge or other shock causes it to change.

This is a point I keep emphasizing.  The issue is not what the Fed does or doesn’t do at the next meeting, it’s what sort of regime do they have.  You can have monetary failures within a regime, but the overwhelmingly more likely problem is monetary failures caused by having the wrong regime (as when the Fed engaged in growth rate rather than level targeting in 2008-09.)

Monetary policy usually encompasses estimates of long-run equilibrium growth, unemployment and interest rates that the economy is expected to hover around, as a guide to how the economy might change over time. Bullard says the current situation may be much more static, an equilibrium that monetary policy has no reason to try to shift.

“On balance, real output growth, the unemployment rate, and inflation may be at or near mean values that could be sustained over the forecast horizon provided there are no major shocks to the economy,” Bullard wrote.

“Key macroeconomic variables including real output growth, the unemployment rate, and inflation appear to be at or near values that are likely to persist over the forecast horizon. Any further cyclical adjustment going forward is likely to be relatively minor.”

What sort of “major shocks” could produce a recession?  I see two possibilities:

Demand-side:  Britain votes to leave the EU.  This triggers anti-euro sentiment in southern Europe.  Fear of default leads to a crisis in PIGS debt, triggering a global decline in AD.  Investors lose confidence in central banks.  On balance, I don’t think this will happen, but it’s possible.

Supply-side:  Regulatory changes and/or dramatically higher minimum wage rates push up labor costs in the US.  I see this as somewhat more likely, but also as having a less powerful short run impact on employment and output, as compared to a demand shock.

Either shock could lead to a mild recession—in combination you could have a repeat of 1937-38.  But on balance I still don’t expect a recession within the next year.  In my view, recessions are mostly unforecastable, especially the part caused by demand-side changes.

Overall, Bullard’s statement is very good news.  I encourage readers not to dwell on exactly where Bullard thinks the fed funds target should be set in the near future, and instead focus on his much more important views on how we need to think in terms of monetary policy regimes.  With apologies to Bullard, I read him as saying something to the effect:

“Look, monetary policy is not about interest rates, it’s about hitting the dual mandate.  There is no evidence that we need to dramatically adjust interest rates going forward to hit the dual mandate, so don’t pretend there is.  The Fed should not be trying to ‘normalize’ interest rates, it should be trying to maintain high employment and 2% PCE inflation.”

PS.  Bullard is somewhat more hawkish than Narayana Kocherlakota, but I see some similarities in the way they approach monetary policy.  In both cases, it’s all about what does the Fed need to do to hit its targets—no other hidden agenda.  I’ve argued that under a sound monetary regime the terms ‘hawk’ and ‘dove’ would no longer have any meaning, and hence I’d like to direct your attention to something in the quotation above:

While that would seem to make the former inflation hawk now the Fed’s most dovish member, those labels would not apply as easily under Bullard’s way of thinking.

Or Kocherlakota’s.

HT:  Brent Buckner


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29 Responses to “It’s Bullard”

  1. Gravatar of Ray Lopez Ray Lopez
    17. June 2016 at 10:14

    What exactly is your point Sumner? Regime change? You’re grasping at straws, trying to give meaning to a few innocent remarks by Bullard. You see ghosts behind every tree.

    And this howler: “With apologies to Bullard, I read him as saying something to the effect:” You’re kidding? You read that into Bullard’s remarks?

    With apologies to Sumner, I read him as saying something like: “I want to stay relevant in the blogosphere so I’ll pretend the Fed is moving towards NGDPLT, even when they’re not. I did the same thing a few years ago when some cryptic language in a Fed statement led some to believe the Fed was targeting NGDP rather than interest rates. It was not true then and it’s not true now, but it gives me good publicity”.

    Fair enough, we all have to have reasons for staying relevant.

  2. Gravatar of ssumner ssumner
    17. June 2016 at 10:21

    Ray, AS/AD is a difficult topic, so let’s take it slowly. On the vertical axis you have “P”, which stands for the price level. Some more advanced books use delta P over P, which means inflation.

    Now your homework assignment is to try to figure out which variable goes on the horizontal axis. I’ll give you 24 hours.

  3. Gravatar of foosion foosion
    17. June 2016 at 11:10

    Here’s a twitter discussion of Bullard’s comments, started by Kocherlakota:

    https://twitter.com/kocherlakota009/status/743879932430942208

  4. Gravatar of E. Harding E. Harding
    17. June 2016 at 11:48

    “In my view, recessions are mostly unforecastable, especially the part caused by demand-side changes.”

    -What would prove you wrong? I think U.S. recessions are mostly forecastable, especially the part caused by demand-side changes.

  5. Gravatar of Bill Ellis Bill Ellis
    17. June 2016 at 12:18

    @ E. Harding…
    dude…you don’t really think trump has a chance in hell do you ?
    That would be hilarious… Watching E.”Baghdad Bob” Harding, go nuts from now until november might be quite entertaining…

  6. Gravatar of Bill Ellis Bill Ellis
    17. June 2016 at 12:21

    E. Harding…Hey…after the election you can just rant endlessly about how the Clinton’s stole the election from The Trumpster…

    won’t that be fun!!!

  7. Gravatar of BJ Terry BJ Terry
    17. June 2016 at 13:22

    I believe you are using “regime” to refer to a different thing than Bullard in the article. You seem to be talking about the policy-setting regime (the system used to set Fed policy) while he’s talking about the state of the economy as a regime, which is how it’s widely used in finance and investing. What Bullard seems to be saying is if we are in a recessionary environment (a recessionary regime), he wants to set interest rates at a fixed level until we enter a “recovery” regime, at which point we would set interest rates to a new fixed rate for the duration of recovery, etc.

  8. Gravatar of Major.Freedom Major.Freedom
    17. June 2016 at 14:56

    Sumner wrote:

    “You can have monetary failures within a regime, but the overwhelmingly more likely problem is monetary failures caused by having the wrong regime (as when the Fed engaged in growth rate rather than level targeting in 2008-09.)”

    …and more importantly as when the Fed engaged in anything whatsoever prior to 2008-2009, that is, since the Fed has existed.

    There is no “right regime” of socialist money. The fact it is anti-market by its existence and activity, makes it perpetually engage in the “wrong regime”.

    NGDPLT is not a “right regime”. It is just another “Fed regime”, destined to fail. Why promote what will inevitably fail?

  9. Gravatar of Fred Fred
    17. June 2016 at 15:21

    Prof Sumner,

    Since you seem to agree with Bullard that the Wicksellian equilibrium rate won’t be rising much in the foreseeable future (I’m a bit more optimistic, though I don’t buy the 3 percent long-run forecast; 2-2.5 seems much more likely to me), what would you propose be done about horrid productivity growth? I’m a bit conflicted on this myself. I feel that the case for overheating to draw discouraged workers back into the labor market has become increasingly less compelling over the past year, so I’m inclined to think some sort of fiscal stimulus geared toward investment, rather than the consumption side, is our best bet.

    Kocherlakota had a similar suggestion–run higher deficits to increase the term premia on longer-term bonds and, hopefully, pull upward on the equilibrium rate. I’m not sure if I’d go that far, but I do think that the Fed should give serious consideration to Bernanke’s suggestion last year (John Williams entertained it, too) to maintain an elevated balance sheet and conduct future “conventional” policy via long-term asset purchases and IOR/ON RRP. I can’t imagine how the Fed would actually begin to unwind, anyway, when a precondition since December has been that “normalization of the funds rate must be well under way.” If Bullard and, by extension, Kocherlakota/financial markets are right, balance-sheet normalization just got pushed far into the future, meaning the Fed would have to change the language so as to undo its own rationale for holding off.

  10. Gravatar of Benjamin Cole Benjamin Cole
    17. June 2016 at 16:48

    Interesting post. I would like to see from both the blogosphere and central bankers more interest in robust RGDP growth. There is plenty of unused capacity, both domestically and globally.

    Not only that, when certain parts of the United States boomed in the shale days, (Dakota and Texas), they did not experience much inflation.

    Other economies, such as Japan and Thailand, have almost no unemployment and yet almost no inflation.

    Bullard is far too timid, and yet, as Scott Sumner points out, he may be among the best of the lot.

    The hysterical squeamishness among central bankers regarding any rate of inflation above 2% is the greatest threat to economic prosperity of our times. Extensive and stipulative property zoning is probably the second-greatest threat.

  11. Gravatar of msgkings msgkings
    17. June 2016 at 17:49

    @B. Cole: yeah there’s plenty of capacity because there’s not much demand for the output. I agree with you that inflation is nothing to worry about right now and bankers aren’t getting it. The world is turning Japanese.

  12. Gravatar of Art Deco Art Deco
    17. June 2016 at 18:56

    There is plenty of unused capacity, both domestically and globally.

    Utilization is mildly under par in manufacturing. Where it’s abnormally depressed is mining and utilities.

  13. Gravatar of Benjamin Cole Benjamin Cole
    17. June 2016 at 20:06

    Art Deco–

    The US sources manufactured goods globally. The domestic utilization rate does not tell a full story. There has been no price increases in automobiles, even nominally, in 20 years.

    Central bankers have their wing-tipped shoes on the monetary windpipes of the global economy.

  14. Gravatar of Michae Rulle Michae Rulle
    18. June 2016 at 07:05

    it is ironic that the Fed Governor states, reasonably, that the Fed has no ability to forecast, right before he forecasts that the economy is not likely to get “Much better or Much worse” than it is now.Yet I doubt you are quoting Bullard because he is a better forecaster. If you like him because he thinks the Fed irrationally wants a more historically normal interest rate environment “just because” then I agree. I agree they should focus on dual mandate. I assume you mean by focusing on markets’ expectation of future fed funds rate. But traders focus not on what should be but will be. So they are in agreement with actual Fed policy as opposed to one driven by the Feds talkadoodle which the market does not believe. I like talk to match action too, but as an objectivist MM, I would think you would not care as much about Bullards forecast and style than you would the markets view that so far the Fed has got it right.

  15. Gravatar of Michael Rulle Michael Rulle
    18. June 2016 at 07:40

    I believe I mistakenly put in wrong eebsite on my moderated entry. The above is correct

  16. Gravatar of Michael Rulle Michael Rulle
    18. June 2016 at 07:41

    website, not eebsite. jeez

  17. Gravatar of Matthew Waters Matthew Waters
    18. June 2016 at 12:19

    “what would you propose be done about horrid productivity growth?”

    Productivity growth means people have to actually make more each hour they work. A central banker certainly has no power to have refineries, hospitals, schools, etc. produce more per hour.

    In any case, what does a school “produce” exactly? Measuring productivity is very difficult. But there are several things weighing on productivity in the traditional widgets/hour sense:

    1. The pervasive housing restrictions have reduced mobility of labor, where the labor could specialize more and be more productive.

    2. There has been a lot of work by corporations to protect against competition, through patents, copyrights, lobbying contracts of adhesion, etc.

    3. Government may not be spending more, but government spending looks much more inefficient than the 50’s through 70’s. The 60’s had NASA while today we have the F-35.

  18. Gravatar of Major.Freedom Major.Freedom
    18. June 2016 at 12:44

    Robert Murphy reviews Sumner’s “Midas Paradox”:

    https://mises.org/library/review-midas-paradox-financial-markets-government-policy-shocks-and-great-depression-scott

  19. Gravatar of Fred Fred
    18. June 2016 at 13:06

    Matthew Waters–

    My question wasn’t meant to imply that central banks right now had the power to raise productivity, but there was a solid case to have been made about a year ago–Bill Dudley made it, Jerome Powell made it (just recently, actually), Alan Blinder made it, and the list goes on–that the decline in trend labor force participation was the primary cyclical driver of slower productivity growth. (See research by Wilcox, Reifschneider, and Wascher, for instance.) The other was slowing investment spending, but because productivity is a function of labor participation and investment is a function of productivity, drawing more workers into the labor force should also pull up on productivity. At least that was the argument back then; at this point, I’m doubtful there even exists such a pool of workers.

    Your point on measurement is well taken, and I would tend to agree that it’s hard to measure nontangible output, but most of the literature I’ve seen suggests that most of the decline in trend productivity can’t be explained by measurement. (Jon Fernald has written on this quite a bit.)

    I agree with your next two points; the third I would somewhat agree with, but for the fact that I think it speaks far more to a slowdown in innovation than the actual efficiency of government investment. And it’s certainly true that government spending in practice is far less efficient than it could be, but that need not mean that it’s constitutionally incapable of being far more expansionary from an LRAS standpoint. That’s why I noted that consumption-based stimulus, which more likely than not will be offset with tighter monetary policy, probably is not the answer.

  20. Gravatar of ssumner ssumner
    18. June 2016 at 13:55

    Thanks foosion.

    BJ, Thanks for pointing that out—I missed that.

    BTW, That’s kind of a strange use of the term ‘regime’.

    Fred, I don’t think fiscal stimulus would help very much. In any case, fiscal stimulus is temporary and it’s a long run problem. I think we need supply side reforms. Tax reform, more high skilled immigrants, zoning reform, tort reform, reduce occupational licensing, less intellectual property rights, etc.

    And push cart venders for Ben. :)

    Mike, No, the market forecast is quite different from the Fed’s forecast.

  21. Gravatar of Art Deco Art Deco
    18. June 2016 at 15:16

    I think we need supply side reforms. Tax reform, more high skilled immigrants,

    Whenever you state a ‘need’, you have an implicit purpose in mind. We do not ‘need’ any ‘high-skill’ immigrants for any purpose all but a tiny minority would care about. The country has 70 million women of child-bearing age and 7 million or more enrolled in public colleges and universities. We have ample raw material to produce ‘high-skill’ workers and entrepreneurs. Any present-tense welfare benefits from importing workers are minimal as far as the extant population is concerned and accrue to slim segments thereof.

  22. Gravatar of Art Deco Art Deco
    18. June 2016 at 15:26

    1. The pervasive housing restrictions have reduced mobility of labor, where the labor could specialize more and be more productive.

    California ain’t America. I also think you’d be hard put to demonstrate that inter-regional migration is less common in this country than it is in Europe.

    . Government may not be spending more, but government spending looks much more inefficient than the 50’s through 70’s. The 60’s had NASA while today we have the F-35.

    Law enforcement’s more effective than it was in 1970 (and much more sophisticated) and the DMV’s a walk in the park compared to what it used to be.

    Of course, you have rapacious public interest lawyers mucking everything up. There is a trade-off, though. A career like that of Robert Moses is no longer possible, and it’s a good thing too.

    If you’re concerned with the performance of public agencies, suggest a restoration of timely civil service examinations for recruitment and promotion, an end to judicial interference in civil service recruitment, and qualified termination at will in public employment provided 3 persons in an employee’s chain of command sign a letter of dismissal (with post-hoc review by hearing examiners should an employee wish to present evidence that his termination was undertaken for one of a half-dozen impermissible reasons). Suggest also that public employee unions be stripped of their franchise to engage in collective bargaining and be limited to acting as mutual aid societies running pension plans, credit unions, actuarial pools, and legal aid services.

  23. Gravatar of Jack’s Links – The Zeitgeist Log Jack’s Links – The Zeitgeist Log
    18. June 2016 at 16:59

    […] Sumner on Fed President James Bullard: they really do need to figure out that whole reconciling dot plots vs. market expected inflation […]

  24. Gravatar of Ray Lopez Ray Lopez
    19. June 2016 at 02:55

    @Sumner – why are you avoiding the issue? Did you AS curve not slope downwards and remain vertical or not? Horizontal axis is typically Y = output/GNP for IS-LM, see: https://en.wikipedia.org/wiki/IS%E2%80%93LM_model

  25. Gravatar of ssumner ssumner
    19. June 2016 at 12:09

    Art, You said:

    “Suggest also that public employee unions be stripped of their franchise to engage in collective bargaining and be limited to acting as mutual aid societies running pension plans, credit unions, actuarial pools, and legal aid services.”

    Excellent idea.

  26. Gravatar of Carl Carl
    20. June 2016 at 20:13

    Art:
    Immigrants are twice as likely to start a business as natives. Why do you think those extra businesses only lead to minimal benefits for the economy as a whole?

  27. Gravatar of Anthony McNease Anthony McNease
    21. June 2016 at 08:34

    I find it amazing and heartening to see how Bullard has gone in the last year or so from advocating to raise rates in order to be able to lower them to where he is today. A remarkable transformation at least in his public views.

  28. Gravatar of Art Deco Art Deco
    21. June 2016 at 12:16

    Why do you think those extra businesses only lead to minimal benefits for the economy as a whole?

    See George Borjas papers quantifying benefits for the extant population.

    As for cumulations of small benefits, look at Japan. Very affluent country with scant history of immigration.

  29. Gravatar of Ray Lopez Ray Lopez
    17. August 2016 at 10:49

    Conor Sen of Bloomberg in his Aug. 17, 2016 column says the significance of the Bullard speech in question is the giving up on forecasting, a point Sumner missed entirely.

    Sen: “In a June 30 speech on the macroeconomic outlook and monetary policy, St. Louis Fed President James Bullard noted that he now looks at macroeconomic outcomes in terms of regimes, with different regimes requiring different monetary policy. But he said that regime changes are not forecastable. By giving up on forecasting changes in regimes, the Fed is deferring to real-time economic data and financial market prices rather than its models, a shift that has large implications for both markets and the economy – rather than markets responding to changes in the economy and from policy makers, the causality may flip, with the economy and policy makers reacting to changes in markets.”

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