James Bullard

“I would have dissented [at the September meeting],” he said. “The case for policy normalization is quite strong since the committee’s objectives have essentially been met.”

“Why do the committee’s policy settings remain so far from the normal when the objectives have essentially been met?” Mr. Bullard said. “The committee has not, in my view, provided a satisfactory answer to this question.”

One of the guiding principles from contemporary economic theory is that monetary policy should be conducted in a systematic and predictable fashion.

Price stability has multiple interpretations. In the late 19th and early 20th centuries, price stability meant that variations in the general level of prices would be transitory: the price index would revert to a mean. In recent policy discussions, price stability generally is interpreted as a small positive rate of inflation. Under these conditions, the level of prices does not revert to a constant, but trends upward. I accept this latter definition of price stability. There may be theoretical and practical reasons to believe that the best price indexes we have available are subject to upward biases. While I am not a big fan of the upward-bias argument—after all, the best-available adjustments are already made to the indexes—I admit that I do not have better measures myself. My preferred definition of price stability is that trend inflation, correctly measured, is zero. In practice, this likely converts into a trend in measured inflation on the order of ½ to 1½ percent, depending on the particular price index referenced.

Let me turn now to more specific comments on the housing sector. Private single-family housing starts peaked in January 2006 at an annual rate of 1.823 million units. Since that time, housing starts have continued to fall; in April 2008, they were only at an annual rate of 692 thousand units, roughly 38 percent of the previous peak value. As striking as these statistics appear, they are not unprecedented. To put the contraction in housing production in a longer-term perspective, it is useful to divide housing starts by the number of households. In February 2006, housing starts per household peaked at 1.65 percent. In March 2008, they had declined to 0.64 percent per household. A startling fall, to be sure, but it has happened before. In January 1973, housing starts per household peaked at 2.10 percent before declining to a trough of 0.94 percent in February 1975. The 1973-75 decline was similar in magnitude to our current situation, according to this metric. A similar phenomenon occurred later in the 1970s. In December 1977, housing starts per household were 2.03 percent before beginning to fall. They fell all the way to 0.66 percent in November 1981. These statistics remind us that housing can be a highly cyclical industry. They also illustrate that the current contraction has clear precedents. Indeed, it is perhaps comforting that the order of magnitude in the previous declines is not unlike today’s figures and that, when housing starts per household have fallen this low in the past, it was near a turning point.

The FOMC has chosen not to announce such a quantitative guideline, although many past and current participants on the Committee have expressed individual preferences or “comfort zones” about ranges of inflation that they personally feel are appropriate objectives for policy. Within the past year, the FOMC has started publishing the ranges and central tendency of the inflation forecasts of the participants on a three-year horizon. These forecasts generally have been consistent with the revealed “comfort zones.” In the media, midpoints of these forecasts are often associated with an implicit FOMC objective for trend inflation. This represents important progress concerning the transparency of the FOMC inflation objective. Still, there is some risk that if the evolving inflation situation appears inconsistent with the inflation objective that is inferred from the revealed preferences of the individual FOMC participants, the anchor for inflation expectations may start to drag or come completely loose.

Inflation expectations have remained remarkably stable, but not at the 1.86 percent headline PCE inflation rate established during the decade from 1994 to 2003. 

As the probability of severe damage to the financial system recedes, the likelihood of a measurable contraction in growth this year has lessened. These conditions complicate the inflation outlook, in which significant economic slack had been seen as helping to keep inflation in check.

I believe that consideration has to be given to the hypothesis that different forces have driven the relative prices of food and energy in the recent past—namely, shifts in demand in world markets. These forces are likely to persist for some time. In particular, I have in mind rapid increases in standards of living in large emerging-market economies. Associated with these increases in living standards are higher consumption of calories and higher consumption of energy and thus increasing demand in the global markets for these products. With low short-run elasticity of supply for food and energy production, these trends in demand generate trends in relative prices.

My sense is that actual headline inflation in excess of 3.0 percent coupled with inflation expectations near 2.5 percent will not be compatible for long. If inflation remains elevated, inflation expectations will begin to move higher. Market participants, businesses, and consumers will come to view higher inflation as part of the economic landscape, in part because of doubts about the Fed’s ability and willingness to keep inflation contained. These expectations, if allowed to persist, will then feed into the equilibrium of the economy and will be difficult to reverse. In short, credibility is much easier to keep than it is to recover.

Should policymakers take into consideration persistent differences in headline and core measures of inflation? ...Let me stress that I do not have an answer to this question, but I think it has become an important concern for the FOMC. Again, what is new here is relative price trends in food and energy that may plausibly be expected to persist for some time. If it were just a matter of the food and energy components being volatile, I think a theoretical case could be made that these prices contain too much noise and so should be ignored in day-to-day policy decisions. Historically, the ex-food and energy calculation seems to have worked well, even though arbitrarily ignoring certain prices is not very elegant. With relative price trends, the ad hoc approach to this question is becoming increasingly untenable.

My sense is that the pace of growth in the U.S. economy over the second half of the year will be positive but slower than its pace over the first half of the year. Although recent developments suggest that headline inflation may moderate from its current levels, price pressures are elevated and several measures of inflation expectations are inconsistent with the medium-term projections of FOMC participants. A key challenge in the current environment is to navigate through substantial financial market turmoil without creating a new and difficult-to-solve inflation problem in its wake.
...

Going forward, falling oil prices, if sustained, should help households and businesses cope with existing strains. In fact, given that the recent decline in oil prices has probably exceeded the near-term assumptions of most forecasters, it is conceivable that economic growth over the second half of the year may turn out to be moderately stronger than the consensus expects.

Most forecasters do not expect to see a bottom in housing construction until early 2009. By then, homebuilders will have probably worked off the bulk of their excess inventories of unsold new homes. However, the inventory of existing homes on the market remains near record-high levels, and it seems likely that it will take longer to work off that inventory. Sales of new and previously sold single-family homes appear to have stabilized over the past few months. It seems unlikely that sales would have stabilized if buyers were still expecting steep price declines.

A key concern is that the current level of the federal funds target rate, at 2 percent, is well below the current rate of overall inflation. This means that the real cost of borrowing short-term is negative. In other words, the FOMC’s interest rate target is unusually low. Over time we will need to adjust this rate to a level that is more conducive to long-run price stability and maximum sustainable employment.
...
The near-term outlook for economic growth and inflation is above all uncertain. Two keys to future economic performance will be stabilization in housing and financial markets. Financial market turmoil has recently been severe, and the consequences of this turmoil on real economic performance entail clear downside risk. If financial market turmoil can be contained, the FOMC can turn attention to achieving better inflation results than those recently experienced. Until inflation clearly moderates, my colleagues and I will need to be especially watchful that our accommodative policy stance does not begin to worsen the outlook for long-run price stability.

Any change in regulation should be designed to ensure that no firm is “too big” or “too connected” to fail because of systemic concerns. Bailouts are expensive—not just because they commit taxpayer funds, but because they can encourage behavior that increases subsequent systemic risk.

When markets are this volatile, I think it is unwise to guess the level of future economic activity, because the economy can take sudden turns in one direction or another. One way to cope with this uncertainty is to describe two possible paths for the economy. Along the first possible path, financial market turmoil has a dampening effect on output and employment, but these effects are mild in comparison with periods of weakness experienced by the U.S. economy since the 1970s. I will call this the benchmark scenario. Along a second possible path, financial market turmoil causes severe dislocation, which sends the economy into a prolonged downturn that matches or exceeds previous recession experiences. I will call this the downside risk scenario.

...

It now appears that the economy may have slowed significantly in the third quarter. This slowing is associated not so much with financial market turmoil, but instead with the rapid run-up in energy and commodities prices during the spring and summer, along with increasing weakness in labor markets.

...

The U.S. economy by the numbers looks like it is slowing. Many of the most recent events have injected tremendous uncertainty into the national outlook, but we have few hard numbers at this point that directly indicate the effect of that uncertainty. If financial market turmoil can be contained, possibly through aggressive government policy, then a relatively benign outcome is possible in which U.S. economic performance is sluggish but does not involve a protracted downturn.

Any stabilization in the housing sector should provide a sizable stimulus to overall growth, all else equal...By the first half of 2009, homebuilders will probably have worked off the bulk of their excess inventories of unsold new homes, and, after three years, we will finally see an end to the drag from this sector.

      "The Fed was very aggressive in the first part of 2008 in reducing interest rates,'' Bullard said during a panel discussion today at Washington University in St. Louis. ``That was taken very much preemptively,'' and ``with the idea that we might be in the situation that we're in right now.'' 

     The central bank's Federal Open Market Committee lowered the benchmark rate four times in January to April. Bullard said ``the wisdom of that is showing up now,'' as the economy falters and credit crunch deepens.

As reported by Bloomberg News

       "The FOMC does not have an official inflation target; the former Chairman Greenspan was opposed to it,'' he said.

``We're working in that direction,'' Bullard said. ``FOMC members and the Fed generally are talking about longer-term inflation outcomes and you can interpret that as something close to a perceived target over a period of, say, five years -- a medium-run kind of episode.'' 

     ``I do think the output gap or some measures of resource utilization have some role to play in some sort of optimal policy to get you toward the inflation target at any point in time,'' he said. ``So I wouldn't be a strict inflation targeter.''

As reported by Bloomberg News

(I)t is far too early to organize a funeral for the Great Moderation. Even though financial market volatility is exceptionally high and even though the U.S. economy is contracting during the second half of 2008, the demise of the Great Moderation would require much more evidence than currently exists. Real economic variables, in particular, would have to swing much more than they have to date, and the increased volatility would have to continue for a number of years before we could start to compare the current environment to the pre-1984 experience and pronounce the moderation dead.

One idea from the Japanese experience is that, with nominal interest rates at very low levels, more attention may have to be paid to quantitative measures of monetary policy. By announcing and maintaining targets for key monetary quantities, the Fed may be able to keep inflation and inflation expectations near target and ward off either a drift toward deflation or excessively high inflation. This will be an important issue for the Fed in coming months and represents a challenge in the communication of monetary policy going forward.

In response to a question about an ultra-low rate policy:

"I have not been a fan of going to really low levels," Bullard said today in a Bloomberg Television interview.  "Why is it zero this time?  I don't quite get that, though I know some people want to go in that direction."

In response to a question about the implications of the slowdown in money supply growth:

 “If you want to go to quantitative measures, then all of the issues about money come back to haunt you.  You have to talk about velocity and shocks to velocity, and you have to think about all the other things that are going on.  That is a debate that existed in the Eighties and probably sort of petered out in the Nineties, but it might be re-merging now.  But I don’t know exactly how the Fed is going to play that going forward.”

 In response to a question about quantitative easing and unconventional methods.

 “I think these issues are being discussed right now, and I don’t know how it’s all going to come out. I will point out that you have the 1979-82 period and there the famous monetarist experiment, for those of your viewers that were around at that time.  And in that case, gave up interest rate targeting, went to quantity targeting, lots of controversy about exactly how that worked and so and so forth, so it’s been done before.  And you could do it again.”

 “I think the Fed has plenty of tools that we can use.  One of the main things that I’m concerned about is somehow we can communicate what we’re going to do to a private sector that is used to thinking in terms of interest rates, because for the time being it looks like that is going to be off the table for a while.”

Federal Reserve Bank of St Louis President James Bullard said on Saturday that an explicit inflation target would help policy-makers prevent either deflation or inflation from taking hold in the United States.

"An inflation target would help focus expectations," he told a panel discussion during the annual meeting of the American Economic Association.

...

"Maybe now would be a particularly good time to do that because you have this possibility of expectations drifting off to deflation or a lot of inflation. ... I think it would help," said Bullard

“I am worried about deflation,” Bullard said today to a meeting of financial analysts in Clayton, Missouri. “Unexpected deflation would worsen the situation in our housing and mortgage markets.”

...

Bullard, 47, expanded on his deflation comments after the speech, telling reporters he sees a “downside risk on inflation” with the recession likely to persist until the third quarter.   “You could end up in negative territory” on prices, he said. “I am worried about it, partly because of the global nature of this recession and I think we are not going to get any good news into the fall of this year. That is going to continue to put downward pressure on prices for a period. Policies have to be designed to avoid that outcome.”

Bullard told reporters after the speech he supports the adoption of an inflation target to prevent expectations for prices from falling too far. A target for inflation “would be helpful at this time,” he said.

“You have to consult with all players, including Congress,” he said. “If they don’t want to do it, then we don’t do it.”

As reported by Bloomberg News

Purchasing long-term Treasuries “is still on the table” as a policy option, Bullard said, answering an audience question.  The debate over buying Treasuries has continued for two meetings of the FOMC and may continue through the spring, Bullard told reporters.   “For now we want to see how other” emergency Fed programs designed to increase credit “work out,” he said.

As reported by Bloomberg News

[W]hile the monetary base has expanded at an extraordinarily fast pace during the fall and winter, much of that expansion has been closely related to the Fed’s lender-of-last-resort function, and cannot be counted on to keep expectations of disinflation and deflation at bay. Because of this, the Fed needs a more systematic method of keeping the persistent component of monetary base growth rates elevated in order to combat the risk of a deflationary trap.

…

“As I have discussed, the Fed’s balance sheet has grown at an astounding rate since September of last year, and the monetary base has more than doubled. But the new, temporary, lender-of-last-resort programs are blurring the meaning of this picture. A temporary increase in the monetary base, by itself, would not normally be considered inflationary. The increase would have to be expected to be sustained in the future in order to have an impact. Much, but not all, of the recent increase in the balance sheet can reasonably be viewed as temporary. The outright purchases of agency debt and MBS are likely to be more persistent, however, and it is these purchases that may provide enough expansion in the monetary base to offset the risk of further disinflation and possible deflation. The quantitative effects of policy actions in this new environment are more uncertain than normal, but nevertheless these less-conventional policies can have every bit as powerful an impact on the economy as changes in the intended federal funds rate.

Should lingering financial turmoil continue to weigh on the economy and stretch the recession out still longer, the zero or negative inflation could continue through 2009. Over that time frame, deflationary expectations could become entrenched. For this reason I think we face some risk—at this point only a risk—of sustained deflation. One important near-term goal for monetary policy is to guide the economy away from this outcome.

From a speech entitled "Dial M for Monetary Policy"

It is well known and widely understood that, over the medium to long run, inflation reflects the growth rate of money. The current environment of exceptionally low short-term nominal interest rates does not prevent a central bank from increasing the money supply. In this sense, stabilization policy goals can be accomplished through influence on the expected rate of inflation.

...In the United States, the size of the monetary base doubled over a four-month period beginning in September 2008. This increase is astonishingly large. However, the increase in the base is in part a byproduct of Federal Reserve programs to assist credit markets and carry out its lender-of-last-resort function...  Temporary increases in the monetary base—here one day, gone the next—would not be expected to have an important influence on the rate of inflation. Therefore, we shall have to segregate the temporary increases in the monetary base associated with lender-of-last-resort programs from the more persistent increases in the monetary base associated with outright purchases of Treasury securities, agency mortgage-backed securities and agency debt. It is the persistent increases in the monetary base that should properly be expected to influence the rate of inflation and therefore have an influence on inflation expectations and real interest rates.

One way of providing a credible nominal anchor for the economy is to set quantitative targets for monetary policy, beginning with the growth rate of the monetary base. This has several advantages. First and foremost, the monetary base is relatively easy to understand, fostering better communication about the thrust of policy. Second, we can be reasonably certain that sustained rapid expansion of the monetary base will be sufficient to head off any sustained deflation.

"We will see a less severe rate of decline in the second quarter, and I am hopeful that we will see some positive growth in the second half of this year," Federal Reserve Bank of St. Louis President James Bullard said.

"We've had two very negative quarters," he said, adding, "I think the economy will naturally return to its balanced growth path. The question is how fast it will return."

As reported by Dow Jones Newswires.

Many people say that the Fed kept interests rates too low for too long in the early part of this decade. During that period, I would have liked to have raised interest rates sooner. When we did raise interest rates, we raised them in a lockstep fashion. I don’t think there is any theory that told you that was the right thing to do.

[M]onetary policy is accommodative right now, and it will remain accommodative for the foreseeable future.

[T]he idea has been to avoid that {a deflationary trap} during the most difficult period here in 2009, but in doing so we’ve increased the monetary base dramatically. We’re also running very large fiscal deficits; normally those would be considered very inflationary developments; so, we kind of have this medium-term inflation risk even while we have a short-term deflation risk.

You could...have the central bank issue its own debt, which sounds radical from the U.S. perspective but is actually done by some foreign central banks. That would require an act of Congress to get that authority, and it is not too clear that Congress would be willing to allow the central bank to issue debt outside of the debt ceiling, which is established by the Congress.

We've got very large fiscal deficits. We've got the appearance...that the Fed is monetizing the deficit, pushing up yields. Anything that is going to erode the independence of the Fed is going to feed that expectation and drive yields higher.

...

So I think we are really in a delicate situation here as regards the independence of the Fed, and that is an important consideration going forward.

...

The Congress has thought over the last 100 years about how much independence to give the central bank. And when they really think about it, at the end of the day, they want the level of independence that we have. And so I think that will be the end outcome of this.  I don't think anyone involved intends to monetize the debt, but that is what it looks like to outsiders.

As reported by Reuters.

Financial markets have not fully understood that the U.S. Federal Reserve's pledge to keep interest rates exceptionally low for an extended period means they will stay low beyond when officials normally would raise them, a top Fed official said on Friday.

"I don't think markets have really digested what that means," St Louis Fed President James Bullard said in an interview.

I haven’t heard anyone really talk about raising reserve requirements.  Those reserve requirements have come down over a long period of time; many other nations don’t really have binding reserves requirements. We don’t really have binding reserve requirements.  I just don’t have any sense that it would go back in the other direction, and that we would start increasing that.

As reported by Bloomberg Audio.

I think what we’re going to have to do is sell off the mortgage-backed securities portfolio as appropriate when the time comes. That would be a difficult decision to make. It would put upward pressure on interest rates. You wouldn’t want to do it too soon, but that’s what we’re going to have to do in order to work down this very large set of assets that we have on our balance sheet… At some point in the future we may have to start selling off as appropriate.

As reported by Bloomberg Audio.

St. Louis Fed President James Bullard, speaking to reporters in Little Rock, Arkansas, said “it might not be necessary” {to purchase the full amount of MBS by year-end}.

…

While purchasing the full amount of $1.25 trillion in mortgage-backed securities may not be necessary, “even if we stop short, it would be close,” Bullard, 48, told reporters after a speech.

As reported by Bloomberg.

“We have spent 20 years refining ideas about interest rate rules and optimal monetary policy,” Bullard said. “We should now consider quantitative rules because we are at the zero bound, and may remain there for some time depending on how the economy performs.”

Bullard noted that while the FOMC had announced its intention to buy up to $1.75 trillion in asset-backed securities by the first quarter of 2010, “there has been little indication of how or whether these amounts might be adjusted given incoming information on economic performance.”

- from FRBSL press release

Uncertainty over the outlook for inflation “is as high as it has ever been since 1980”, James Bullard, the president of the Federal Reserve Bank of St Louis, has told the Financial Times.

...

The St Louis Fed president said he would not favour tightening policy before recovery was well-established. “You are going to need to have jobs growth and you are going to need to have unemployment declining.”

But once the recovery looked solid and there were consistent good monthly job gains, the Fed could “remove some of the accommodation”.

Mr Bullard said tightening “does not have to involve as its first step moving the federal funds rate off zero”.

Instead, he favoured at that point selling back assets bought by the Fed in the course of its unconventional easing.

Most Fed officials fear that asset sales would rock the markets and push up long-term interest rates, including mortgage rates. However, Mr Bullard said: “It seems perfectly reasonable to me.” He argued that, with proper planning, asset sales did not need to be disruptive.

Living with a bloated balance sheet for too long would risk fuelling inflation, he warned. “I am concerned that if, over a longer term, you just leave this many reserves in the system, under any ­normal theory . . . that is raw material for the money supply.”

“Policy rates are near zero in the U.S. and the rest of G-7 countries, something not seen in postwar economic history,” Bullard said, adding that interest rates may stay low for some time. “The FOMC did not begin policy rate increases until 2 ½ - 3 years after the end of each of the past two recessions.” Assuming that the most recent recession ended this past summer, and assuming that the FOMC would behave in the same way that it’s behaved in the past, this could mean the FOMC would not start increasing rates until early 2012. To be sure, Bullard said the FOMC will be heavily weighing concerns that stem from criticisms that the Fed kept interest rates too low for too long, contributing to the housing market bubble.

I would just like to keep [the agency bond and MBS purchase programs] active at a very low level instead of saying we’re shutting down, shutting down permanently. Initially it would do nothing for the economy, but it would give the Fed the option to react to future news as it comes in... If the economy came in very weak, let’s say, in 2010, weaker than expected, we would have the option of doing further quantitative easing.  If the economy came in stronger than expected and inflation expectations started to ratchet up a little bit we could maybe sell off some of these assets and remove some of the accommodation from our quantitative easing program.

We should keep [the Treasury and GSE asset purchase programs] a little bit open... [The Fed should] stay open to possibly purchasing more or possibly selling off assets in 2010.

I’m on the record not putting as much weight on the slack argument as others might. It is a factor but it is not as big a factor as many people make it out to be. You always have to look at slack in combination with inflation expectations. And right now, inflation expectations are about as uncertain as they’ve been since the 1980s. There are widely varying opinions about what might happen over the next three or four years. Some people think you might get a lot of inflation in this circumstance with a bloated balance sheet and fiscal deficits. Other people think that the economy will recover slowly and that will put downward pressure on core. I’d be in the former camp on this issue.

I think we can grow at an above trend pace in the first half of 2010. And I think we’ll see the jobs numbers start to turn positive in the first half of 2010. If you talk to business leaders, they’re very reluctant to hire. They’re very cautious. They’re very cautious about their capital expenditures. But I think as they see the economy improving they’ll be caught without enough workers and without enough capital expenditure and they’ll have to revise up their plans.

I suppose {the extended period language} is in play right now. Everybody is thinking about when the appropriate time to raise interest rates is. Right now would be too early. The recovery is just getting started and jobs growth hasn’t even turned positive yet. So it is a little bit too early to be talking about raising rates. That’s why I like to talk about other instruments that we can use and other margins that we can adjust on while we’re waiting for the conditions to be right to raise rates.

The key thing about any sales is that you do it very slowly in a very controlled manner. It would just be a matter of remaining active in the market for MBS securities and not a matter of hurriedly trying to sell off a big chunk of the portfolio. You wouldn’t want to do anything like that. That would be very damaging. But you could think about small amounts of sales that would help us get our balance sheet back to normal at an appropriate pace that would still provide a lot of support to the recovery. If you start to make some moves to go back toward normal, it is still an accommodative policy. You can take small steps as the economy improves.

...We’ve got to get {the FEd's balance sheet} to an appropriate size at an appropriate pace. This is a lot, more than doubling the monetary base. I don’t think it is threatening imminent inflation, but if you just leave it there without proper care you could get a lot of inflation out of that.

...I’d like to have {asset sales} be an option that we can entertain if the economy comes in pretty robustly in 2010. We could sell off a little. Not in the way that would upset markets, but in a way that would help us get to an appropriate sized balance sheet at an appropriate time.

Governments around the world have shown they're going to stand behind (troubled) large financial firms...government guarantees mean there won't be a renewal of the financial panic seen in the fall of 2008.

 The market’s focus on interest rates is disappointing, given quantitative easing.  Markets are still thinking of monetary policy strictly as changes in interest rates—even though the Fed has been conducting successful policy this past year through quantitative easing. Markets should be focusing on quantitative monetary policy rather than interest rate policy.

I think we will see job growth going forward because at some point firms will be caught short of employees... Usually when [the unemployment rate] starts ticking down it continues on a downward track

Selling [assets] has more sympathy than you might think. It's more a question of timing and speed... Maybe you get in the second half of 2010 or something like that, if things are going pretty well, maybe then you'd sell a little bit at that point and you'd try to see how the market reacts and then you go from there. Some scenario that looks like that would be a more sensible way to think about how the committee might approach this. Let me stress, no decisions have been made but there has been a lot more discussion about it.

The clear lesson is that the Fed had insufficient access to information about the financial landscape going into the crisis, meaning that it did not have a full understanding of the potential for feedback between the financial sector and the rest of the economy... As the crisis began, all eyes turned to the Fed as the lender of last resort. This always happens in a crisis—only the central bank can play the lender-of-last-resort role... Going forward, the Fed will also be at the center of all future crises because of this lender-of-last-resort role. Therefore, reforms should provide the Fed with direct access to detailed information across the entire financial landscape.

Smaller banks did not cause the crisis and do not need to be re-regulated. Current regulation works well for the thousands of smaller banks in the U.S. The system features deposit insurance plus prudential regulation. It allows failure, but prevents bank runs and the panic associated with them.

On inflation, Bullard said that inflation is currently at reasonable levels, and there's not too much to worry about in the short-term. The risk is the medium term, he said, two to five years out, that if the central bank does not take appropriate action, inflation could become a problem. He said he was confident though that policymakers would act appropriately.

Bullard also added that inflation expectations are key. If inflation expectations went up sharply, "that would trump all other concerns," he said, "and the Fed would take action."

The asset purchases are being financed by reserve creation, or ‘printing money.’  The monetary base has expanded rapidly.  In contrast to the liquidity programs, the expansion of the monetary base associated with the asset purchase program is likely to be very persistent.  This has created a medium-term inflation risk.

"We want to someday get back to a pre-crisis balance sheet -- both the size of it and the fact that it would be an all-Treasuries balance sheet,” Bullard said today in a telephone interview. “There does seem to be agreement that you want to get back to a normal-looking balance sheet at some point in the future.”

...

“You have to think about what kind of time horizon you want to get back to that normal balance sheet, and probably that has to involve some asset sales at some point,” said Bullard, who is a voting member of the rate-setting Federal Open Market Committee this year.

Bullard, 49, said there’s no agreement among policy makers on when to start the sales, and the economic recovery remains too fragile to start now.

“I don’t think you could do any kind of tightening policy right now,” Bullard said.

[W]e are nowhere near where we need to be in terms of having a useful, comprehensive macroeconomic model that we can use to get the economy to perform at its peak level. Our current effort is not sophisticated enough to handle the challenges that lie ahead.  A more intensive national research effort in macroeconomics is needed.

It depends on how the economy is looking going forward and we don't want to get ourselves in a box that we're going to take a particular action on a particular calendar date.

The Fed should remain involved with community bank regulation so that it has a view of the entire financial landscape. It is important that the Fed does not become biased toward the very large, mostly New York-based institutions.

"Everything depends on how the economy performs," said Federal Reserve Bank of St. Louis President James Bullard.

While the Fed has for some time officially stated its inclination to keep interest rates very low for an extended period, Bullard said that pledge is "conditional." When it comes to saying when interest rates might rise from their current zero percent range, the official said, "I can't."

[E]rosion of Fed independence could result in a 1970s-style period of volatility. The consequences for the U.S. and the global economy would be large. No one would be served well by this outcome.

When the crisis was at its peak in the fall of 2008 and the first part of 2009, those [dollar currency] swap lines were heavily used across the countries...  But even though we've reopened the swap lines, it remains to be seen whether those swap lines will be used as much as before.

There is nothing intrinsic about [soveriegn debt] crises that they need to become important shocks to the broader, global macroeconomy.

[Bullard] reiterated that he would favor selling assets before raising rates when the time comes, although he conceded there were other official points of view.

Governments have made it very clear over the course of the last two years that they will not allow major financial institutions to fail outright at this juncture. Because these too-big-to-fail guarantees are in place, the contagion effects are much less likely to occur.

Unless events in Europe turn out to be much worse, I think that in the near term, the U.S. is probably a beneficiary of the crisis in Europe... I don’t think it should push back [the date for the Fed to begin tightening].

One of the persistent worries during this crisis has been that some of the largest financial institutions in the U.S. and Europe might be exposed to additional losses and that a type of financial contagion could occur should conditions worsen. I think this is a misreading of the events of the past two years. U.S. and European policymakers have essentially guaranteed the largest financial institutions. This has been the essence of the very controversial "too big to fail" policy. The policy has clear problems, including its inherent unfairness and the fact that economic incentives for institutions that are guaranteed can be badly distorted. But to argue that governments would now give up these guarantees in the face of a new shock that could threaten the global economy seems to me to be far-fetched.

My sense is that, while the sovereign debt crisis in Europe is indeed a serious matter, the global recovery at this point looks very strong and seems unlikely to be derailed.

Promising to remain at zero for a long time is a double-edged sword. The policy is consistent with the idea that inflation and inflation expectations should rise in response to the promise, and that this will eventually lead the economy back toward targeted equilibrium. But the policy is also consistent with the idea that inflation and inflation expectations will instead fall, and that the economy will settle in the neighborhood of the unintended steady state, as Japan has in recent years.

To avoid this outcome for the U.S., policymakers can react di¤erently to negative shocks going forward. Under current policy in the U.S., the reaction to a negative shock is perceived to be a promise to stay low for longer, which may be counterproductive because it may encourage a permanent, low nominal interest rate outcome. A better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities.

A voting member of the interest-rate setting Federal Open Market Committee, Bullard said that it was better practice to persuade his colleagues rather than dissenting in FOMC votes. "The tradition is you argue vociferously, then rally around the chairman."

As reported by Dow Jones News

Policy actions should be commensurate with the risks that the economy faces. A series of smaller policy actions can add up to a large action, but only if incoming data suggest that as the appropriate course... Purchase size should be in proportion to the size of any deterioration in the outlook.

Asked about the possibility that the Fed would lower the interest it pays on banks' excess reserves, currently at 0.25 percent, as a further step to stimulate growth, Bullard suggested the impact might be too small.

"I don't think it would be particularly effective. It's kind of a dead-end policy, you can only do it once," he said.

As reported by Reuters

My own sense is that the new facility will not have the credibility needed to deter the perception of too big to fail until it is actually used successfully.

"I think the FOMC did make a move to position itself to be able to act if necessary, to take more action, more easing type action.” He added, “The purchase of longer-dated Treasurys is the most promising action we can take.”

“If the Fed does take more action, I do not think it should be a shock and awe kind of move,” Bullard said. He instead prefers a more incremental approach to buying Treasurys that could tack with incoming data.

“The risk of double-dip recession has probably receded some in the last six to eight weeks," Bullard said today in an interview with CNBC. "The economy has slowed, but it hasn’t slowed so much that it’s an obvious case to do something. A very reasonable decision would be to say, ‘maybe we should push it off a meeting or two and see how the data comes in.’

...

Bullard said the next Federal Reserve meeting on Nov. 2-3 will be an analysis “blizzard” and the decision will be a “tough call.” 

“I will go into the meeting with an open mind and you don’t want to prejudge these things,” he said. While the case for more stimulus isn’t a “slam dunk,” if the situation calls for it, “we’ll have to take action,” he said.

(Editor's note:  Click here for CNBC's take on Bullard's "not a slam dunk" comment some months later.

“If we do decide to go ahead with quantitative easing, I think there is a good program we could adopt, one I like, which is to think in units of $100 billion between meetings” of the Federal Open Market Committee, Bullard said today at a conference hosted by the district bank.

“We could give forward guidance for the next meeting that would suggest how likely the committee thinks we would continue these purchases.”

As reported by Bloomberg News

For a competing perspective from the St. Louis Fed's research director the following day, click here.

It is also possible to overreact, shutting down a particular financial market practice which in reality does not pose a systemic risk. During the technology boom of the 1990s, many argued that a bubble had formed and that policymakers should address the bubble with appropriate action. Still, I think few would now argue that we would have wished to miss out on the technology boom of the 1990s. Closing off those developments through aggressive policy might have deprived the economy of important advances in productivity.

Easing of monetary policy produces its maximum impact on real variables in the economy, including output, consumption, and investment, with a lag of six to 12 months and can be difficult to disentangle.

The extent of Congressional meddling in this market has been astonishing to the point where one can barely identify what the private sector outcomes would be in the absence of intervention.

To the extent possible, we need to let the private sector provide the bulk of U.S. housing finance going forward, without the incentive‐distorting set of government programs and taxpayer guarantees that caused our current system to collapse. Those programs meant well, but ended up costing everyone dearly.

The Federal Reserve would reduce its planned purchases of $600 billion in Treasuries only after a substantial improvement in the U.S. economy, St. Louis Fed President James Bullard said.

“The economy would have to improve a fair amount before the whole committee would pull back on that,” Bullard said today in an interview on Bloomberg Radio’s “The Hays Advantage,” with Kathleen Hays. “I think that is a possibility, but it would depend on hard data that would force us to reassess where the economy is going in the future.”

Bullard said he favored a rule, similar to the Taylor rule for setting the federal funds rate, that would adapt the level of the Fed’s easing to incoming data on the economy and inflation. He said he didn’t favor setting a $600 billion asset purchase target, preferring a smaller number that would be adjusted at each Fed meeting, although he voted for the policy.

As reported by Bloomberg News

St. Louis Federal Reserve Bank President James Bullard said Wednesday he considers the central bank's planned purchase of $600 billion in U.S. Treasurys as a "form of forward guidance" that can change based on incoming economic data.  However, Bullard suggested the Fed could be doing a better job explaining reasons for the latest stimulus measures.

As reported by Dow Jones News

The Fed’s only engagement with [the Consumer Financial Protection Bureau] is to fund it. The law requires that the equivalent of 10 percent of Federal Reserve System expenses be transferred to the CFPB in 2011, 11 percent in 2012, and 12 percent in 2013 (where it will stay fixed in perpetuity).

I am concerned about this method of funding for the Bureau. The amount of money allocated in the law is not based on any careful assessment of what the needs of the Bureau will be as it attempts to fulfill the mandate of the Congress with regard to consumer protection. Nor is there any mechanism for changing these amounts going forward, should market conditions change, or if the needs of the Bureau change.

Regarding the rise in nominal interest rates, Bullard said that QE2 puts downward pressure on nominal rates through securities purchases but that the effects of successful policy would put upward pressure on nominal rates.  Therefore, Bullard argued, looking at the level of nominal rates alone is insufficient to judge the success of QE2.

"I would like to adjust the {LSAP} program meeting by meeting...I think we can look at this going forward," he said.

"To me it's very much reviewable and changeable. People talk about QE3 and QE4...they think we're going to announce another big number. I don't see it like that. I see it as a continuous process," Bullard said.

{Bullard} still expects unemployment to decline “only slowly” and said he’s not ready to push changes to the Fed’s program of buying $600 billion of Treasuries through June, dubbed QE2 for the second round of quantitative easing.

“It’s too early to make a judgment on that,” said Bullard, 49, who voted in favor of the program in November and rotates into an annual non-voting position this month. “We really only have about two months, and in the macroeconomic world that’s not enough data to go on. So I’d like to see fourth-quarter results in particular and more of the data from 2011.”

From a personal interview, as reported by Bloomberg News

Bullard stated that ahead of the November FOMC meeting, the policy change had been largely priced into markets, and the financial market effects were conventional. In particular, he said, “real interest rates declined, inflation expectations rose, the dollar depreciated, and equity prices rose.” Bullard added, “These are the ‘classic’ financial market effects one might observe when the Fed eases monetary policy in ordinary times.” Bullard concluded that “quantitative easing has been an effective tool, even while the policy rate is near zero.”

Since QE2 was announced, the economic outlook has improved, Bullard noted. “The natural debate now,” he said, “is whether to complete the program, or to taper off to a somewhat lower level of asset purchases.”

Although commodity standards were last discussed when U.S. inflation was high and variable, Bullard noted that today, inflation is quite low.  He added, “Tying the currency to commodities when commodity prices are highly variable is questionable.” 

While a commodity standard forces accountability on the central bank, “it did not always work because governments sometimes changed the rate between the commodity and the currency,” Bullard said.  “Inflation targeting is another way to force more accountability to the central bank and anchor longer-term expectations.   Make the central bank say what it intends to do,” he said, “and hold the central bank accountable for achieving the goal.” 

“Inflation targeting,” Bullard concluded, “is the appropriate modern alternative to historical commodity standards.”

I have been critical of gap-based analyses of inflation dynamics in the past.  Those criticisms still apply:

• Theoretical issues are unresolved. 
• Gap measurement issues are acute. 
• Empirical relationships between gaps and inflation are shaky.

Still, the idea of “global output gaps” is one way to frame the recent criticism of the Fed and promote fruitful debate.

MR. KERNEN: I remember before QE2 started we were with you in St. Louis, and you gave us a little bit of a head fake here and there about whether it would actually -- that it was a done deal, that it was going to happen, when I think it was going to happen all along.

Now I feel like you're giving us a little bit of a notion that "We might end early" when, in fact, there's no intention of ending early.

MR. BULLARD: I'm telling you what I think. I'm just one guy on the --

MR. KERNEN: I know.

MR. BULLARD: -- one guy on the committee. You can talk to anyone else and see what they say.

MR. KERNEN: There won't be any QE3, though.

MS. QUICK: We did have a guest who sat here last week and said higher oil prices means we're looking at QE3. Is that --

MR. BULLARD: Well, I don't think we're in that position yet.   This has not gone on long enough. You'd have to see if the shock is really persistent. Also it doesn't strike me that it's really big enough at this point. You're talking, if I've had the numbers right, 98 bucks on West Texas Intermediate this morning. That's up. You know, it's certainly a concern, but it's not so high at this point.

I wouldn't be averse to stopping a little bit short on our QE2.

And, you know, you might say, like, okay, you only do $500 billion instead of $600 billion. Well, how much difference can that make? Well, not very much, but I like subtle judgments, because I think that's the game we're in. And we do want to send the signal that we are concerned about this and we do want to be able to unwind the balance sheet at some point.

..

I don't think you can print money indefinitely and be casual about what the consequences might be. You've got to be very serious that this could create a lot of inflation going forward. It has not. That's true. But this has to do with our credibility being able to move the balance sheet back to a more normal level in a reasonable amount of time.

“We are still feeding the fire at this moment, so I think we have to start thinking about turning this around in the near future,” Bullard told reporters while attending a financial conference in Prague today. “If the economy is as strong as I think and hope it will be in 2011, I think it will be time for us to start to reverse our ultra-aggressive and ultra-easy monetary policy.”

If uncertainties in the global economy are resolved, “we could pull up a little bit shy of our total of $600 billion,” he said. “I think it could be on the order of $100 billion less than what we initially thought.”

The process of normalizing policy, even once it begins, will still leave unprecedented policy accommodation on the table... The FOMC may not be willing or able to wait until all global uncertainties are resolved to begin normalizing policy.

"We have an ultra-easy, uber-easy monetary policy in the U.S. and we have to think of how we are going to exit from this policy in a way that keeps inflation low and stable,” Bullard said.

“I do think the economy has come in stronger than we anticipated at the time of the November decision to embark on” the bond purchases, Bullard told reporters.

Shrinking the Fed’s $2.65 trillion balance sheet should be done actively rather than by “runoff” through maturing mortgage-backed securities, Bullard said. “That is a passive policy,” he said. “That doesn’t sound like optimal policy to me.”

“Headline inflation is the ultimate objective of monetary policy with respect to prices,” Bullard said, noting that these are the prices households actually pay. “Core inflation is not an objective in itself,” he added. “The only reason to look at core is as an indicator for headline.”

“The financial market effects of QE2 looked the same as if the FOMC had reduced the policy rate substantially,” Bullard said. “In particular, real interest rates declined, inflation expectations rose, the dollar depreciated, and equity prices rose. These are the ‘classic’ financial market effects one might observe when the Fed eases monetary policy in ordinary times.”

Federal Reserve Bank of St. Louis President James Bullard said it’s “reasonable” to expect the central bank will begin tightening by the end of 2011 in order to get ahead of inflation, the Wall Street Journal reported.

“We’ve got to start taking some steps to start to tighten monetary policy as we continue on through 2011 to make sure we don’t allow inflation to get away from us,”

“Inflation targeting is another way to force more accountability to the central bank and anchor longer-term inflation expectations,” Bullard said. “Make the central bank say what it intends to do, and hold the central bank accountable for achieving the goal.”

“In this sense, inflation targeting is the modern successor to a commodity standard,”

“Headline inflation is the ultimate objective of monetary policy with respect to prices,” Bullard said, noting that these are the prices that households actually pay. “Core inflation is not an objective in itself,” he added. “The only reason to look at core is as an indicator for headline.”

“I still think it is reasonable” to expect tightening by year end, Bullard said today in a Bloomberg Television interview in New York. “I like a balance-sheet-first policy and I think the Fed will take a balance-sheet-first policy."

It is time to drop the emphasis on core inflation as a meaningful way to interpret the inflation process in the U.S.

One immediate benefit of dropping the emphasis on core inflation would be to reconnect the Fed with households and businesses who know price changes when they see them.

“If the economy comes in reasonably strong in the second half of the year, which I think it will, the likely next move would be to tighten policy,” he said. “The most likely way to do that would be to allow some runoff of the balance sheet.”

“Headline inflation is the ultimate objective of monetary policy with respect to prices,” Bullard said, noting that these are the prices that households actually pay.  “Core is not an objective in itself,” he added.  He said that while the only reason to look at core is as an intermediate target for headline, “its use as an intermediate target is questionable.”

"We're close to the high tide for [the Fed's] easy-money policy," said Federal Reserve Bank of St. Louis President James Bullard.

Overall, Bullard said that QE2 was classic monetary policy easing. “This experience shows that monetary policy can be eased aggressively even when the policy rate is near zero,” he said.

“Balance sheet policy, like all monetary policy, should be conducted in a state-contingent way,” Bullard added. (In other words, policy should be adjusted based on the state of the economy.)

“The financial market effects of QE2 looked the same as if the FOMC had reduced the policy rate substantially,” Bullard said. “In particular, real interest rates declined, inflation expectations rose, the dollar depreciated, and equity prices rose. These are the ‘classic’ financial market effects one might observe when the Fed eases monetary policy in ordinary times.”

Bullard noted that the Federal Open Market Committee (FOMC) has not taken action to reduce the size of the balance sheet and remove this inflationary threat. “I conclude that monetary policy remains ‘ultra-easy’ for now. This is an appropriate setting for monetary policy today,” he said.

“However, I expect that the economy will improve during the second half of the year and into 2012,” Bullard said. “As it does, the FOMC will have to monitor the situation closely in order to remove accommodation at an appropriate pace.”

I wrote that the cores were out and we should start focusing  more on headline inflation. You can check it out on my web page and what (ph) a recent speech I gave. But I've argued pretty strenuously that it's inappropriate to be throwing out food and energy prices. And especially in this environment where those are the prices that are going up the most. Those are the key shopping experiences for many households. It really hurts Fed credibility to be ignoring those prices when we're talking about inflation. So I'm very much in favor of looking at the headline number. I would smooth it out a little bit by looking at it over the last year or something, but - but I'm perfectly happy to look at the headline number.

“Policy should be set according to the state of the economy, not according to the calendar,” Bullard said. “I didn’t like putting calendar dates in.”

Asked if the Fed still has the power to deliver momentum to the recovery, Bullard said, “I’m not one to say we are out of ammunition.” Bullard, who is not a voter on the Federal Open Market Committee this year, said the Fed can still stimulate the economy “mostly through balance-sheet policy.”

“The committee has made no decision on ‘Operation Twist,’ so I think the market might be a little bit out in front on this question,” Bullard said. He added that when the Fed last tried this policy, “it didn’t work very well at that time.”

Now, with further slowing in the economy, some call for further monetary accommodation. Let me stress that no decision has been made on this difficult question. However, should such a decision be made, I think it is time for the Committee to discard one-time policy changes with fixed end dates. The Committee in the past never contemplated announcing several hundred basis point moves to be completed at a date certain. Yet that is how the Committee behaves today.

Simply promising to keep the policy rate near-zero for longer and longer periods of time may encourage a Japanese-style outcome in which the policy rate simply remains near zero and markets come to expect a mild rate of deflation.  This possibility has clear support in the theoretical literature but is too often ignored in policy discussions.

The Fed has potent tools at its disposal and is not now, or ever, "out of ammunition."

You should make policy according to the state of the economy, not according to the calendar.  It’s very awkward for the committee to be trying to move that date around.

“It is reasonable to wait and see how the Twist policy affects the economy,” Bullard said, referring to September’s so-called Operation Twist measure. “Given that the tone of the data has been better, you want to get into next year” before you consider more action.

“We already have a very easy policy in place,” he said. “That’s something that is often missed in this discussion. We are appropriately calibrated for the situation we are in.”

“The data have come in stronger than expected, so I think the logical thing now is to wait and see,” Bullard said in an interview in New York today at the Bloomberg Hedge Fund Conference.  “See if we continue to get a good read on the holiday season and start out the New Year stronger or weaker, and also assess the situation in Europe and see how that feeds back to the United States.”

“I think we’re very close to having inflation targeting in the U.S.,” Bullard said in a Bloomberg Radio interview today.

“This may be the opportunity to get something done that everyone on the committee can rally around.” “I think it would come in the form of some kind of statement from the committee that would name a target but would also reiterate some of the things we’ve said over the years about how keeping inflation low and stable contributes to great economic performance overall,”

Federal Reserve Bank of St. Louis President James Bullard said policy makers’ interest rate forecasts may be misinterpreted by markets as a commitment for the future path of policy.

“There is some risk of that,” Bullard said on a conference call with reporters today. “Although I think markets will soon discover that there’s one projection at some point in time, and if the economic situation changes dramatically,” then the forecasts will change, he said.

I was … opposed to stretching this out, putting the late 2014 date in the statement. I am very disappointed with this. I thought it was an opportunity for the committee to get away from calendar dates and the committee didn't do that. I would have defected on this issue. I've been vocal about this before. I think the chairman correctly said that we can't forecast accurately that far ahead. He said it in a very - very funny, actually.

My only guess is that we will have to move before but I just got done saying we tried to forecast, so - you'd be better off to say wait and see, but I put it in 2013 so - but that's just my best guess.

You have to get started on normalizing rates at some point and it's not that once you move off zero and you go to 50 basis points, or 75 basis points, you don't exactly have a tight monetary policy. You still have extremely low interest rates by any normal metric and so it takes a while to turn the ship. So, to say that you're going to wait for such a long time to come off zero seems to me to be inconsistent with the way that the committee has behaved in the past and wanted to get going on the process, understanding that you're still providing a lot of accommodation to the economy even when it's only 1 percent or 1.5 percent, or 2 percent.

Well, I think QE is [an option] but at this point I think it should only be deployed if the economy deteriorates significantly. We've already got a very easy policy on the table. We're already taking a lot of risk with that balance sheet and I think the economic news and the economic data could indicate that it's been surprising to the upside so I think we're in a situation where we should keep QE3 in reserve.

I think [the criterion for QE] is much more of a deflation side as I think it is - one thing about QE2 is that inflation was running at a very low rate in the fall of 2010. We did turn that around and now inflation is running higher - I think PC headline was about 4.2 percent - as measured from a year earlier, in the fall of 2010. Now it's running 2.4 percent or so, as measured from a year earlier. So, it's quite a significant move up in inflation and so I do think it does help us on that dimension.

A lot of forecasters really have what I would call a hysteresis forecast for U.S. unemployment so what they're saying is that it won't go down. It might go up from where it is right now over the next two years. If that really happens - and I don't really see the basis of that - but if they think that that's really what's going to happen, then I think it would be very dangerous to tie monetary policy directly and numerically to the unemployment rate as has sometimes been suggested, so it's exactly in the situation where you're worried about hysteresis, which is sort of a European style of unemployment outcome.

Near-zero rate policy has its own costs. If we were proposing to remain near-zero for a few quarters, or even a year or two, one might argue that such a policy matches up well with the short-term business cycle dynamics of the U.S. economy. But a near-zero rate policy stretching over many years can begin to distort fundamental decision-making in the economy in ways that may be destructive to longer-run economic growth.

“I wouldn’t take QE3 off the table ever,” Bullard said in a CNBC interview, referring to a third round of purchases or quantitative easing. “We should use it only if the economy deteriorates and especially if the inflation numbers start to drift down into disinflation or deflation. Headline inflation is above target.”

Bullard said if the Fed undertakes another round of bond buying, he’d prefer the U.S. central bank stick to buying Treasuries, instead of mortgage debt, because the Fed aims to get back to a Treasuries-only portfolio.

Asked whether the Fed has ruled out a third round of quantitative easing, Bullard said "we never take anything off the table, we want to keep our options open," because the economy can be unpredictable.

"But for now, things are looking better for the U.S. economy and I think it's a good time to wait and see, collect more data," he added.

“With numerous monetary policy actions still on the table, and others still affecting the economy with a lag, it may be especially difficult to remove policy accommodation at the appropriate pace and at the appropriate time,” Bullard said at an investment conference sponsored by Credit Suisse Group AG. “One may want to approach such a situation with caution.”

The (FOMC) has said that the first rate increase will be late 2014 but there is a lot of uncertainty about that date. If we continue to get better data about the U.S. economy, I think the likely move would be to shorten the time until the first rate increase.

I think late 2013 could be the date of the first rate increase, but I am just one man and the committee's judgment is 2014.

"I think QE3 would require the economy to deteriorate somewhat from where it is right now," Bullard said. "The basic story on the U.S. economy is that we've had good news over the last six months or so, especially compared to the recession scenario that was being painted in the August-September time period of last year."

"Inflation has been a threat especially for countries with quasi-fixed exchange rates with the dollar," Bullard noted, without mentioning specific countries.

Bullard said he was opposed to the 2014 conditional pledge, which may lead consumers and businesses to believe the Fed has an unduly negative outlook.

“Neither the Fed nor any other forecaster has a clear idea of what macroeconomic conditions will be like at that time,” he said. “This is an unwarranted pessimistic signal for the FOMC to send.”

The policy-making Federal Open Market Committee reiterated in its March 13 meeting that the economy will likely warrant low interest rates through at least late 2014. That date will likely change as the outlook for the economy shifts, Bullard said today.

“As we get closer to the actual date, we’re going to have to move it around because the situation will have changed,” he said. “I wouldn’t be reluctant to revise it.”

Bullard, asked by the audience to respond to criticism of the Fed as too intrusive in financial markets, said, “I want market solutions to all of our problems.”

“You can’t outmarket me,” he said.

As long as we continue to go along in the current mode, which is moderate growth, continuing improvement in labor markets, inflation above target but coming down toward target, in that kind of situation we can stay on pause.

“Generally speaking, the U.S. economy has done better than expected in the first part of 2012,” Bullard said today in Louisville, Kentucky. “My own forecast has rates going up a little sooner” than other central bankers, or “late 2013.”

"I'm one that thinks that Greece could exit, and it could be handled in an appropriate way without causing too much damage, either in Europe or in the U.S.," St. Louis Federal Reserve Bank President James Bullard told Reuters.

“One possible FOMC strategy is to simply pocket the lower yields and continue to wait-and-see on the U.S. economic outlook,” Bullard said. While Europe’s turmoil is driving global problems, “a change in U.S. monetary policy at this juncture will not alter the situation in Europe.”

The current stance of monetary policy is ultra-easy, and remains appropriately calibrated given the macroeconomic situation in the U.S.

The ultra-easy monetary policy has been appropriate so far, but could reignite a 1970s-type experience globally if pursued too aggressively. The 1970s era included 4 recessions in 13 years, double-digit inflation, and double-digit unemployment. The lesson was clear: “Do not let the inflation genie out of the bottle.”

If anything, the Committee may be trying to do too much with monetary policy, risking monetary instability for the U.S. and the global economy.

Monetary policy is a blunt instrument which affects the decision making of everyone in the economy. It may be better to focus on labor market policies to directly address unemployment instead of taking further risks with monetary policy.

The {Fed's} current communication strategy operates with only a few variables, while the economy is described by many variables. The FOMC could instead publish a quarterly document akin to the Bank of England’s “Inflation Report.” A report of this type could potentially lay down a benchmark “Fed view” on the key issues facing the U.S. economy. Release of the report could be coordinated with the quarterly press briefings conducted by Chairman Bernanke.

[A]mong the many cross-currents and uncertainties facing the U.S. economy, the most important one is the continued uncertainty emanating from the European situation.

"If things slow down a lot more and the U.S. economy looked like either that it was going into recession or that deflation would develop, then I think we could consider more action, but I don't think we are there at this juncture," Bullard told reporters after the conference,

"Twist has been extended through the end of the year, but we are running out of balance sheet. There is a limited amount of short-term Treasuries that we can sell and buy long-term Treasuries. So I don't think you can look at any more extension of Twist beyond the end of the year."

Now, I do think that the minutes are a bit stale, because we have some data since then that's been somewhat stronger. But I think, you know, the tone of the discussion, to me, anyway, and just my interpretation, was that, gosh, you know, things are not as good as we thought. And if it continues to decelerate here, we're going to have to do something.

...

This would be unusual for the Fed to take really big action based on this data constellation. So just think about where we were last year at this time. Markets were really in turmoil. You know, things were, you know, much worse. Recession probabilities were high last year. Right now recession probabilities probably aren't as high. Measures of financial market turmoil were really high last year. They’re not that high right now. Equity markets down sharply last year at this time.

Now we're looking at all-time highs. European situation in turmoil last year; not good, still a wild card. So I think, you know, interest rates, longer-term interest rates, you know, very low right now. So I think it's a different constellation.

MR. BULLARD: So, as you guys know, I've been advocating {an open-ended month-to-month purchase program} as an approach to QE, I've been advocating this at least since 2010, and I do think it makes more sense. I think the committee has been haunted by these end dates, which are arbitrary. You know, the end date comes along. The data may or may not be cooperating at that point.

And so I think it is a better way, just as a way to implement policy. That's sort of a separate question about whether we should do it or not. But if we do do it, I think that that's the better approach. And I've appreciated that there's been more support, quite a bit more support, on the committee than there has been when I first started this. I was an army of one when I first started this, so --

      MR. LIESMAN: Can you give us an idea what this would look like?

      MR. BULLARD: -- I think President Williams, President Rosengren and others have come out explicitly in favor.

      MR. LIESMAN: How would this manifest itself? In other words, it  would be a meeting and you would announce at that meeting the amount of quantitative -- of treasuries and/or mortgage-backed securities to buy?

      MR. BULLARD: Yeah, I think, simply explained, it would just be to do balance-sheet policy as the exact analog of interest-rate policy. So you would say we'll purchase a certain amount from -- you know, during the intervening period when we get -- and we'll have a continuation value, which would give us some bias toward whether we're going to continue at the next meeting or not. But we are going to review at the next meeting. We're going to look at the data at the next meeting. And we reserve the right to say we'll change the amount or we'll go on pause or whatever. 

The committee has talked about lowering interest rate on excess reserves.  We have gone round and round on this issue. I kind of think this might be a time to try that out.

[I]t is clear the Fed could be “missing on both sides of its mandate” during the entire time it takes the economy to return to normal, even when the monetary policy is sound. In fact, missing on both sides of the mandate is exactly what one would expect under an appropriate monetary policy. Furthermore, the literature suggests that the adjustment times are quite long, possibly many years.

“The FOMC has in fact essentially behaved as if it was price level targeting. In this sense, policy since 2008 looks close to optimal,” he said, calling this “a singular achievement of recent monetary policy.”

Bullard said that inflation is sometimes seen as a way to partially default on existing nominal debts; if actual inflation is higher than anticipated, the debtor ends up paying less to the lender in real terms. In this scenario, he said, “The partial default would occur against savers, mostly older U.S. households, and against foreign creditors.”

Such a policy would not be without future costs, Bullard emphasized. “A partial default today through higher inflation would be paid for via higher inflation premiums in future borrowing,” he said. “Creditors would want to protect themselves against the unpredictable central bank that might surprise them with a burst of inflation. Nominal interest rates would be higher than otherwise into the distant future.”

Extending Operation Twist is “unlikely” because the Fed has “only so much balance sheet we could use” to sell short- term securities, Bullard said. On the other hand, purchasing Treasuries outright “is definitely an option on the table.”

“It is reasonable to think that an outright purchase program has more impact on inflation and inflation expectations than a Twist program,” Bullard said today in a speech in Little Rock, Arkansas. “If the goal is to keep policy on its present course, the replacement rate should be less than one-for-one.”   From the Bloomberg News summary

Responding to questions after his speech, Mr. Bullard said he would like to keep monetary policy on an even keel after Operation Twist's end, and given the desire to keep the potency of policy about the same, he said he favored the Fed buying about $25 billion a month in Treasury purchases.  From the Dow Jones News summary

The Committee may need to recognize that thresholds will likely be treated as triggers for action in financial markets.

“I think that unemployment will continue to tick down through 2013,” Bullard said today in an interview on CNBC television. A 7.1 percent rate “would probably be substantial improvement” in the labor market, he said, referring to the Fed’s goal for halting its open-ended monthly purchases.

o Fiscal policy adjustments through tax, spending, and borrowing policy tend to be slow and must be carefully negotiated.
o Monetary policy can be implemented in a timely and technocratic manner.

Hence the conventional wisdom:
o Focus fiscal policy decisions on the medium and longer run.
o Delegate monetary policy to an independent authority

Financial crisis aftershocks have introduced a “creeping politicization” of central banking globally.
o The macroeconomic performance of nations with politicized central banks has historically been quite poor.
o One live example of the current trend is the ECB’s OMT program.
o One interpretation of the OMT is that it is a fiscal-type operation, and that ordinary monetary policy has become part of the negotiation over the fiscal package.
o This has altered the response of the ECB to the European recession.

Bullard told reporters that “it’s a very aggressive policy and it is making me a little bit nervous that we’re over- committing to easy policy.”

Measuring the overall health of the labor market involves many dimensions and is a complicated matter. The state of the labor market cannot be adequately summarized in one number, whether it's the unemployment rate, payroll employment growth, the labor force participation rate or some other measure. Therefore, evaluating the overall labor market by simply looking at a single indicator would not be appropriate for monetary policy.

A possible alternative is to build an index of labor-market health that gives weight to all of these different dimensions and provides some idea of the health of the labor market in an overall sense. Even in this case, however, the Committee would likely weight the dimensions differently; so, agreement on a specific index would be problematic. What is clear is that, evaluating in a comprehensive way whether the outlook for the labor market has improved substantially and, thus, when to bring the latest balance-sheet policy to an end, will require the FOMC to consider numerous factors.

“We should think about tapering or adjusting the program,” Bullard said yesterday in an interview in Washington. “If you get some good data for a couple of months, maybe you’d say, ‘Okay, we go back to $75 billion per month instead of $85 billion or something like that.’”

“You don’t want that cold turkey aspect to the program,” he said. “If we got some good signs through the spring or the summer, then I think we could throttle back just a little bit without saying you are going to end the program on any particular day.”

US Federal Reserve officials fear a backlash from paying billions of dollars to commercial banks when the time comes to raise interest rates. The growth of the Fed’s balance sheet means it could pay $50bn-$75bn a year in interest on bank reserves at the same time as it makes losses and has to stop sending money to the Treasury.

…

Mr Bullard said that neither interest paid to banks nor possible losses on exit made any difference to the substance of monetary policy.

“I think it’s more just a question of the optics, and how you’re going to play the optics,” he added, referring to the perception of losses by the central bank. “And since it shouldn’t matter in a monetary policy sense you might as well play the optics in a better way than the one we’ve got planned.”

…

One possible answer to the Fed’s larger balance sheet is to sell assets earlier in the exit process. Mr Bullard said that the Fed could consider creating accounting reserves now for any losses it expects in the future.

Fed policy is very easy, and it’s going to stay easy for a long time. That’s my main message this morning.

“It is full steam ahead right now,” Bullard said today on Bloomberg Radio’s “Hays Advantage” with Kathleen Hays. “That is exactly what the committee is doing.”

“What I’d like to see is some good healthy peaks that have job creation well above the rate of new entrants into the labor market, followed not by valleys that take back some of that progress but at the very least by a nice plateau that can be the basis for some more peaks later,” he said.

“I don’t think we have to be in any hurry” to cut stimulus, Bullard said. “The committee has more comfort in a situation in which inflation is low.”

“If inflation drifted down in conjunction with renewed economic weakness,” the committee may consider increasing its monthly bond buying, he said.

The St. Louis Fed chief said when it comes time to slow purchases, he favors reducing the pace by small increments in response to changes in the economy. “I would be very comfortable moving in small amounts -- $10-or-$15 billion at a time,” Bullard said in the interview at the St. Louis Fed. “We are getting much closer” to the committee agreeing to a tapering approach, as indicated by Bernanke’s comments last month.

Bullard, one of the first officials to urge slowing the pace of bond buying in 2013 if economic conditions allowed, said today policy makers probably will “slowly ratchet down the pace of purchases” as the economy continues to improve.

“That’s a great policy, serves us very well,” Bullard said today. “And the notion that when a little bit weaker data comes in or a little bit stronger data comes in, well the Fed policy is going to adjust in response to that -- so I think that’s been a very good development.”

"People have been focusing on unemployment a lot but maybe are a little bit blinded that the inflation numbers have come in very low," St. Louis Federal Reserve Bank James Bullard told reporters on the sidelines of the Minsky conference hosted by the Levy Institute in New York

...

"I'm getting concerned by that," Bullard said, adding that inflation running below the policy-setting Federal Open Market Committee's price stability target gives the group "room to maneuver."

Pressed by reporters to indicate exactly what "room to maneuver" means, Bullard - a voter on the FOMC this year - said, "I think if inflation continued to go down I'd be willing to increase the pace of (asset) purchases.

"As it stands right now inflation has drifted lower on a PCE basis. This is not what I expected and I think inflation should be closer to target than it is."

There is little historical evidence that the maturity structure of the U.S. debt is an important macroeconomic variable.  Any effects from the twist operation were probably minor.

Even if we do taper, it would still be a very aggressive pace of purchases because we would only be moderating the rate by a small amount ... I don't think we are actually that close at this point to talking about an exit.

Before I am in favor of tapering I would like to see some assurance that inflation is going to move back towards target.

Labor market conditions have improved since last summer, suggesting the Committee could slow the pace of purchases, but surprisingly low inflation readings may mean the Committee can maintain its aggressive program over a longer time frame.

Federal Reserve Bank of St. Louis President James Bullard dissented with the Federal Open Market Committee decision announced on June 19, 2013.  In his view, the Committee should have more strongly signaled its willingness to defend its inflation target of 2 percent in light of recent low inflation readings...

President Bullard also felt that the Committee’s decision to authorize the Chairman to lay out a more elaborate plan for reducing the pace of asset purchases was inappropriately timed.  The Committee was, through the Summary of Economic Projections process, marking down its assessment of both real GDP growth and inflation for 2013, and yet simultaneously announcing that less accommodative policy may be in store.  President Bullard felt that a more prudent approach would be to wait for more tangible signs that the economy was strengthening and that inflation was on a path to return toward target before making such an announcement.

In addition, President Bullard felt that the Committee’s decision to authorize the Chairman to make an announcement of an approximate timeline for reducing the pace of asset purchases to zero was a step away from state-contingent monetary policy...

While bond yields would naturally rise if macroeconomic performance was stronger than expected, Bullard said that “the evidence on current economic performance is mixed.” For instance, while some measures of labor market outcomes have improved since QE3 was launched in September, others (e.g., hours worked and the labor force participation rate) have not. Bullard also noted that real GDP growth has been slow in recent quarters. Therefore, he concluded, the rise in yields probably cannot be justified by better data on the U.S. economy.

One influence on the FOMC “that is really hurting” may have been the timing of quarterly press conferences, Bullard said. The committee may feel obligated to make major changes in policy only during meetings when there is a press conference rather than at any meeting, he said. “I have urged the chairman to change that policy” and hold media briefings after each meeting, he said. “I think it is an important limit and it is a bureaucratically imposed limit.”

“Pulling back on accommodation as inflation is sinking is not the right combination,” Bullard, who votes on monetary policy this year, said today in a Bloomberg Television interview with Michael McKee to air July 15. “I’d like to see us do more” to ensure inflation doesn’t continue to slow.

Bullard last month dissented against a pledge by the Federal Open Market Committee to maintain its current level of bond buying, saying the panel should “signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings.”

Price gains have been “very low,” Bullard said today. “I’d at least like to see inflation tick up a little or get some kind of reassurance” that it “will come back toward our target.”

An accurate measure of inflation is important for both the U.S. federal government and the Federal Reserve's Federal Open Market Committee (FOMC), but they focus on different measures. For example, the federal government uses the CPI to make inflation adjustments to certain kinds of benefits, such as Social Security.3 In contrast, the FOMC focuses on PCE inflation in its quarterly economic projections and also states its longer-run inflation goal in terms of headline PCE…

Given that the two indexes show different inflation trends in the longer run, having a single preferred measure that is used by both the federal government and the FOMC might be appropriate…

The FOMC carefully considered both indexes when evaluating which metric to target and concluded that PCE inflation is the better measure. In my view, headline PCE should become the standard and, therefore, should be consistently used to estimate and adjust for inflation. Although adopting a standard measure would likely not be a simple matter, it would provide clarity to the public about which one more accurately reflects consumer price inflation.

Mr. Bullard noted that inflation is “low” and “near the lower edge of acceptable outcomes.” He added “on balance, inflation expectations have declined since March,” and said the Fed “would not normally remove policy accommodation in an environment where inflation is below target and is projected to remain there.”

The central banker said it is also challenging to determine the health of the labor market. Based on the unemployment rate alone, declines in joblessness suggest improvement, while other measures indicate the labor market might not be as healthy as the unemployment rate indicates. But he also said “payroll employment growth has generally been strong.”

On the growth front, recent data have been “weak,” but there are reasons to be hopeful for the future. “Real estate markets are improving, equity markets have rallied, the European sovereign debt crisis remains subdued for now, U.S. fiscal brinkmanship has been less of a problem, and household deleveraging is further along,” he explained.

That said, Mr. Bullard said “I have generally been too optimistic” about the economy’s outlook, and because of this, “I think caution is warranted in taking policy action based on forecasts alone.”

In other comments, the central banker noted the Fed’s balance sheet, while very large in absolute terms, “is not particularly large when scaled by GDP and compared to other major central banks, or when compared to historical data on the Fed’s balance sheet.”

As reported by WSJ.

“The committee would not normally remove policy accommodation in an environment where inflation is below target and is projected to remain there,” said Bullard, who votes on policy this year, in Louisville, Kentucky.

Bullard suggested the Fed could exercise caution by cutting back by only a modest amount.

"There are a lot of ways this could go. You could do a small amount of tapering versus a larger amount," he said.

“I don’t think we have to be in any hurry,” Bullard said today in a CNBC interview from Jackson Hole, Wyoming. “Inflation is running low and we have got mixed data on the economy.”

“So I’d be cautious,” said Bullard, who votes on monetary policy this year. “We want to take our time and assess what’s going on before we make a move.”

“We can afford to be very deliberate in our decision making,” Bullard said.

“That was a borderline decision” after “weaker data came in,” Bullard said today on Bloomberg Television’s “Bloomberg Surveillance” with Tom Keene and Sara Eisen. “The committee came down on the side of, ‘Let’s wait.’”

Bullard called October a “live meeting,” because “it’s possible you could get some data that change the complexion of the outlook and could make the committee be comfortable with a small taper in October.”

…

“I’m a little dismayed at those in markets that are saying they’re surprised by this,” Bullard said. The Fed said that, “if the economy was going to improve in the second half of the year, and if we saw that improvement, we would taper.”

... I think it enhanced our credibility in the sense that it showed we really are paying attention to data and not on some automated program to cut QE to zero.

“To the extent that key labor market indicators continue to show cumulative improvement, the likelihood of tapering asset purchases will continue to rise,” Mr. Bullard said in a presentation prepared for delivery at a hometown speech. That is because the Fed’s “criterion of substantial improvement in labor markets gets easier and easier to satisfy on a cumulative basis as labor markets continue to heal,” the official said.

“For me, you don't have to be in a hurry {to taper} because of low inflation," St. Louis Federal Reserve President James Bullard told CNBC television.

Bullard, who at the Fed's policy meeting last week voted in favor of maintaining the central bank's monthly bond buying campaign at an $85 billion monthly pace, said he wanted to see inflation heading back toward policy-makers' 2 percent goal before tapering bond buying.

I have tried to offer some perspectives on the nature of the macroeconomic situation during 2008.
At the one-year anniversary of the financial crisis, in August 2008, it appeared that the U.S. had weathered the crisis reasonably well, and that continued slow growth was likely.
However, the effects of the commodity price boom during the preceding year, peaking in July 2008, contributed to a slowing economy during the third quarter of 2008.
This greatly exacerbated the financial crisis and led to multiple financial firm failures.

Bullard noted that some analysis suggests that the sooner policymakers set the policy rate to zero, the sooner the economy will recover and the sooner interest rates can be returned to normal. “I have seen no evidence that this is true during the last five years,” he said. “Instead, I think the December 2008 FOMC decision unwittingly committed the U.S. to an extremely long period at the zero lower bound similar to the situation in Japan, with unknown consequences for the macroeconomy,” Bullard cautioned.

“A small taper might recognize labor-market improvement while still providing the committee the opportunity to carefully monitor inflation during the first half of 2014,” Bullard, a supporter of record stimulus, said yesterday in St. Louis. “Should inflation not return toward target, the committee could pause tapering at subsequent meetings.”

"[The Fed's tapering decision] is data dependent, and not just on the labor market, but on inflation,” he said. “If inflation stepped lower in a clear way I think that would give me some pause” about supporting more trims to bond purchase, Bullard said.

Bullard revealed for the first time that he was one of the two FOMC participants show foresaw a 2014 rate hike in December and said he made that forecast because he was "more optimistic" than many about the outlook for economic growth and employment.  He said he had previously expected the first rate hike to come in 2015.

With the March meeting less than a month away, Bullard said, "I definitely will have to reconsider at this meeting" whether the first rate hike will come in late 2014 or in 2015.

"Even in December, it was a close call," he said, adding that "if it moves back a quarter" it makes little difference.

"We have to start to get out of the mode of emergency policy" and think about making monetary policy "more normal," Bullard said.

He told his audience that, even though the Fed is scaling back its large-scale asset purchases, it is "still buying a lot." He said continued "tapering" remains on track at coming meetings of the FOMC.

Federal Reserve Bank of St. Louis President James Bullard defended Janet Yellen’s comments on interest-rate increases, saying her outlook is in line with private surveys on when the central bank might start tightening policy.

Treasury yields jumped March 19 after Yellen said in her first press conference as Fed chair that rates could rise “around six months” after asset purchases end, most likely in the fall.

Bullard, speaking in Washington today, said “the surveys that I had seen from the private sector had that kind of number penciled in as far as I knew.”

“That wasn’t very different from what we had heard from financial markets, so I think she’s just repeating that as that time period,” Bullard said at a roundtable at the Brookings Institution. Bullard doesn’t vote on policy this year

The U.S. unemployment rate will fall below 6 percent by the end of this year, a Federal Reserve official said on Wednesday, offering a bullish view on the country's economy after central bank comments sent shock waves through financial markets last week.

James Bullard, president of the Federal Reserve Bank of St. Louis, said that the outlook for the U.S. economy is "quite good," despite data from early in the year. "The biggest thing is that unemployment has come down more quickly than expected," said Bullard, speaking on a panel at the annual Credit Suisse investor conference in Hong Kong.

He added later during a question and answer session that more progress is needed in the labor market before U.S. policymakers can consider raising interest rates.

Bullard is known to be one of the Fed's more hawkish policymakers. He previously advocated for a rate hike as early as 2014, a stance he appears to have backed away from.
…
Bullard was asked about where he saw interest rates in 2016, at which point he referred to his "dot."… "I'm here to tell you that my dot has not changed," Bullard said.

“While first-quarter GDP growth was weak, growth in coming quarters is still predicted to be robust,” Bullard said, referring to gross domestic product. “The average quarterly pace of growth in 2014 may still be an improvement relative to 2013,” he said. The average pace of quarterly growth in 2013 was 2.6 percent.
The St. Louis Fed official told reporters after his speech the recent pickup in U.S. employment is “very encouraging.” Unemployment will probably fall below 6 percent by year’s end, setting the stage for the first Fed tightening at the end of the first quarter in 2015, he said.
“Inflation may be moving back to target as the committee has been predicting,” Bullard said. The Fed’s preferred measure for price increases may rise to 1.6 percent by the fourth quarter, he said.

If you get 3% growth for the rest of this year, if you get unemployment coming down below 6%, if you continue to have jobs growth at 200,000, if you continue to see inflation moving back up toward target, I think if we get to the fall of the year and all of those things are transpiring as Im suggesting they will, that will change the conversation about monetary policy, and there will be more sentiment toward an earlier rate hike.

“The idea that the Fed might get behind the curve is a powerful one, and that’s certainly been the history of the institution. People are right to worry about that,” Mr. Bullard said.

Mr. Bullard said he did not share the sentiment of some of his colleagues, expressed in the Fed statement after its July meeting, that its benchmark rate may need to remain historically low “even after employment and inflation are near mandate-consistent levels.”

He said he has not revised his view of the long-run fed funds rate as somewhere around 4%. For this reason, Mr. Bullard thinks the Fed may need to raise rates more quickly than some of his colleagues do. “It takes a long time to do this normalization–it’s like turning a supertanker in the ocean,” Mr. Bullard said. “Waiting too long might get us into trouble.”

…

“The end of the first quarter of 2015 is still my preferred liftoff date” for raising the fed-funds rate, Mr. Bullard said.

"The market is trading too dovishly compared to the committee,” Bullard said today in an interview on SiriusXM satellite radio. “I think that’s probably a mistake,” he said, adding that market participants “should come closer to where the median of the committee is.”

Bullard said he projects the FOMC will announce the first rate increase since 2006 at the end of the first quarter of 2015, while noting his forecast is “probably on the early side” of those of his colleagues on the committee.

“The case for the end of the first quarter next year is improving because labor markets have improved a lot,” he said.

“I don’t think it would have to be that large of a program. Possibly several hundred billion would be enough,” Bullard said, referring to the Fed’s overnight reverse repurchase facility, which it has been testing since September.

“If that didn’t work, the committee could revisit that and increase the size of the program if we thought that was necessary,” Bullard said in an interview yesterday with Kathleen Hays on Bloomberg Radio in Jackson Hole, Wyoming.

"I'm sticking right now with end of the first quarter [rate] liftoff," he said. "But that is very dependent on my forecast, which has us growing 3-plus percent into the second half and has nonfarm payrolls and other labor market indicators continuing to improve."

However, I also think that inflation expectations are dropping in the U.S. And that is something that a central bank cannot abide. We have to make sure that inflation and inflation expectations remain near our target. And for that reason I think a reasonable response of the Fed in this situation would be to invoke the clause on the taper that said that the taper was data dependent. And we could go on pause on the taper at this juncture and wait until we see how the data shakes out into December.

Well I think its a bit much that I said anything like that. I said you might consider pausing in our taper program. Our taper program was supposed to be a state contingent program that would be adjusted as the data came in and as I was speaking we certainly had markets thinking that global recession was on the horizon and if there was ever a time to be state contingent maybe that was it. Now as it turns out that all kind of evaporated and the committee did a very sensible thing at the meeting last week; we cited lower market measures of inflation expectations which showed concerns for that issue, but we also cited survey based measures which are more stable about inflation expectations. And so I think that it shows we are keeping a watchful eye on this issue. We went ahead and closed the QE program; I thought that was the right judgment for that meeting.

Inflation at the current level is not enough to justify remaining at a near-zero policy rate. Low inflation can justify a policy rate somewhat lower than normal, but not zero.

Federal Reserve Bank of St. Louis President James Bullard said Friday he still favored raising U.S. interest rates by the end of the first quarter, even with inflation well below the central banks 2% target.

Mr. Bullard said he was willing to adjust the pace of further rate increases to reflect wider economic trends, but that a lift off in inflation was not as important as moving short-term rates from near zero.

I still think we should get going with our rate rises, he told reporters after a speech in Chicago. The data lift off {date of liftoff?}is not so critical as the pace.

Mr. Bullard said the Fed risked falling behind the curve if it waited until June, when many investors and some policy makers expect the first rate increase. He added that if the central bank waits until summer to move, the rise could be followed by a faster pace of subsequent increases.

The level of inflation is not so low that it can alone justify a policy rate of zero, Mr. Bullard said earlier in a speech in Chicago.

Fed's Bullard says no direct impact on U.S. from Swiss franc move

The currency market turmoil sparked by the Swiss National Bank's lifting of its euro cap will not have a direct impact on the U.S. economy, a top Federal Reserve official said on Friday.

St. Louis Federal Reserve Bank President James Bullard said he was not aware of any warning that the Swiss bank gave to the Fed ahead of its move to lift the cap, which sent the Swiss franc soaring and led to huge foreign exchange losses across the globe.

"The Swiss economy is just too small to have an impact," Bullard said, in a session with reporters here after a speech he gave to the CFA Society.

Bullard said that events have gone against the Swiss National Bank, as Europe's economy has weakened and the European Central Bank is nearing a decision to launch a major bond-buying program, which puts tremendous pressure on the euro/Swiss franc exchange rate.

"I don't want to Monday morning quarterback these guys. But if you want to learn a lesson from it, I think it's got to be that if you're going to undertake a policy like that you also have to have a careful reasoning about under what conditions you expect to remove your policy," Bullard told reporters.

I do worry about TIPS-based inflation compensation and it has been down a lot recently and it does concern me. What I want to do with that is wait and see what happens in global oil markets, wait and see what equilibrium turns out to be and then see what happens with breakeven inflation at that point.
...
But right now, weve got such a big dislocation in oil markets it might be mixing up the signal coming from TIPS-based breakevens.

Although the 1994 normalization cycle was considered disorderly (i.e., uneven amounts that were somewhat unpredictable), it seemed to set up the U.S. economy for success in the second half of the 1990s. On the other hand, the 2004-06 normalization cycle was considered orderly (i.e., perfectly even amounts that were generally anticipated) but, in retrospect, turned out to be suboptimal because it allowed for the continuation of speculation in housing markets and in mortgage finance. For the upcoming normalization cycle, some combination of the twothe data dependency from the 1994 case and the transparency from the 2004-06 casewould probably provide the optimal method of returning the policy rate to normal.

"For now I think we should set the TIPS inflation data aside until after oil prices stabilize,"

Keeping interest rates near zero is not the right interest rate for this economy. We are much closer to our goals than we have been in a long time. Inflation is a little bit low, but it is not low enough to rationalize the zero interest rate policy, Mr. Bullard told Bloomberg TV.

As long as we feel confident that inflation will go back toward target, and right now that is my baseline projection that inflation will go back toward target, I think we are certainly able and willing to raise rates."

I would say I would rather get off zero sooner, and then have more flexibility to go slower and react to data down the road.

These labor markets are improving so rapidly that I think unemployment will be down below 5% in the second half of this year so if you're sitting around and you haven't even come off zero and the unemployment rate has come down below 5% that seems a little bit extreme to me.

We should take out patient in March to provide optionality for the committee going forward, Bullard, a non-voting member of the FOMC this year, said in an interview with CNBC.

If we take it out, then we can move at any of the meetings during the summer. But we dont have to. We can make it be data dependent, which is what Id like, he said.

The burden is still on the data, and if oil prices stabilize, tepid inflation data will likely abate and help open the door to central bank action, he said. Oil prices are the main reason for inflation weakness and it is likely the strong declines seen in recent months wont continue, which means the strong drag they have imposed on headline inflation, which is well below the Feds 2% target, will almost certainly abate over time, [Bullard] said.

Im not that worried today about bubbles, but from here going forwardis the time when we are most vulnerable to the financial bubbles that emerge when easy money policies persist in an economy that has been growing for some time, [Bullard] warned. He noted that even as the Fed edges closer to rate rises it still expect interest rates to stay very low for well into the future. That could be a recipe for financial markets to get into trouble, and he doubts regulatory powers will be enough to reduce the threat, he said.

Recalling the tech bubble in the 1990s and the housing bubble of the 2000s, he said: "Zero [interest rates] is too low in that kind of environment. I wouldnt be comfortable with that. A zero rate would feed into an asset price bubble".

"When asset bubbles start, they keep going until they blow up out of control with devastating consequences." [Financial Times]

“I would say the flight to safety is a bullish factor for the U.S. Increased global uncertainty might be a bearish factor,” Bullard told reporters after delivering a speech in St. Louis on Tuesday. “They roughly offset so it would not change the timing of any rate hike. I would say September is very much still in play.”

...

“Every meeting is in play depending on the data. Whether we would get enough positive data to push the committee to make a decision in July, I don’t know,” said Bullard, who next votes on the FOMC in 2016. “The tone of the data has been stronger in recent weeks. We are staying data dependent.”

...

’’I would like more evidence that the second quarter is rebounding. I have seen some evidence. I would like to see more,’’ said Bullard, before adding “I have not become a dove.”

St. Louis Federal Reserve Bank President James Bullard warned Tuesday that low interest rates may be feeding a new asset price bubble.

Bullard said he is open to weighing evidence that conditions are different than in the late 1990s when the stock market went through a high-tech "dot.com bubble," but said it appears to him that stock valuations, particularly in the tech-heavy Nasdaq Composite index are high.

Bullard cited a number of what he considers danger signs of a possible stock bubble and asked "do low interest rates feed this process?"

"The net wealth to disposable income ratio has returned to a high level," he observed in remarks prepared for delivery to an Emerging Venture Leaders Summit. "It has been high and volatile since the mid-1990s."

He also said the Nasdaq is "near a high in real terms" and "the price-earnings ratio is relatively high but still below the 1990s peak."

"Can the U.S. escape the boom-bust cycle this time?"

Answering his own question, Bullard said, "My view is that low interest rates tend to feed bubble processes."

Bullard, who will be a voting member of the Fed's policymaking Federal Open Market Committee next year, said "the Fed should hedge against the possibility of a third major macroeconomic bubble in the coming years by shading interest rates somewhat higher than otherwise.

"The benefit would be a longer, more stable economic expansion," he added.

There’s a more than 50-50 chance the Federal Reserve will raise interest rates in September, St. Louis Fed President James Bullard said.

“The economy is much closer to normal today than it’s been in quite a while, certainly over the last five years,” Bullard said Monday in an interview on Fox Business Network. “The main problem is we are in emergency settings for monetary policy.”

“We are good position to make the first normalization move,” Mr. Bullard said. “My sense is that a 25 basis-point move would essentially be a nonevent in financial markets,” he said, referring to the likely 0.25% increase the first move is expected to be.

Mr. Bullard doesn't currently vote on the FOMC, but he is an influential voice on monetary policy matters. In recent comments ahead of the interview, he had expressed support for raising rates this year and had nodded toward September. He said he would have voted for Wednesday’s holding action. “I would have supported the committee’s decision to wait and get more data and make a decision at the September meeting.”

“I know there are a lot of worries about global growth, a lot of it coming from China,” Bullard, who votes on monetary policy next year, said Friday in a SiriusXM Business Radio interview. “I would probably be more sanguine than the market in that dimension.”

He also said the Fed doesn’t react directly to equity markets, as the Standard & Poor’s 500 Index headed toward its worst week in three years.

The key question for the committee is -- how much would you want to change the outlook based on the volatility that we’ve seen over the last 10 days, and I think the answer to that is going to be: not very much.

You’ve really got the same trajectory that the committee will be looking at that we were looking at before, so why would we change strategy, which was basically to lift off at some point.

The committee does not like to move when there’s volatility. If we had the meeting this week, people would probably say let’s wait.

Note:  Bullard also said he would support scheduling a press conference following the Oct. 27-28 FOMC meeting if the committee doesn’t raise rates next month. That would make it easier for the Fed to explain a liftoff in October.

I’m willing to respect the volatility in markets and see how it shakes out here. But just sitting here today, I’m not seeing how this is going to change the forecast and therefore I think the contours of monetary policy are about the same today as they were a couple weeks ago. But I’m open to looking at data, and we don’t have to make a decision until we get to the meeting, so why not wait until the meeting and see if things settle down here quickly?

At 5.1%, the unemployment rate is near that long-run level. But some Fed officials have expressed concern about the inflation rate, which has run well below the central bank’s target for more than three years. But Mr. Bullard said that wasn't in itself enough to justify such loose monetary policy.

Much of the weakness in inflation, he said, is due to lower oil prices, which he described as a “temporary” phenomenon.

“Oil prices will stabilize so that when you look at year over year inflation it’s going to start coming back to 2% over the forecast horizon,” he said.

“I've got a message for your friend Jim Cramer. The Fed cannot permanently raise stock prices. The idea that the Fed is going one way or the other, and this is what's driving the stock market, is not true. He's one of the great people at looking at businesses, how good is this business, what's the profitability of the business, what's this thing worth? And to have him cheerleading for lower rates 24-hours a day is, I think, unsavory.”

...

Bullard outlined his case to Cramer. "We're at zero [percent] policy rates and we're at [a] $4.5 trillion balance sheet when the unemployment rate was right on top of the committee's estimate of the natural rate." He also said inflation is showing signs of picking up.

"We have vanquished all our foes. It's time to get off the emergency settings," Bullard added.

Bullard said there should be a news conference by the Fed chief after every meeting, instead of the current every other meeting schedule. "You'd smooth it out, making every meeting the same. There's no additional importance given to any meeting," he said.

Policy will remain exceptionally accommodative through the medium term no matter how the Committee proceeds.

Based on central bank orthodoxy, the most prudent course of action is to begin to normalize the policy rate slowly and gradually, under the interpretation that the Committee will still be providing considerable monetary accommodation to the economy to guard against potential pitfalls and risks as the quarters and years ahead unfold. By adopting this prudent approach to monetary policy strategy, policy tools will eventually be returned to the toolbox, and the Committee may be able to lengthen the expansion longer than it may otherwise extend.

I have set up this simple classic view because I think that, on balance, this view suggests the best path forward for U.S. monetary policy.

“The die has been cast. We are going to have extremely accommodative policy for two to three years,” assuming a gradual increase in the federal funds rate towards more normal levels, Bullard said. “The risk is that you stay with emergency settings way beyond the time emergency settings are required, with unknown consequences. So the simple thing to do is edge your policy back to normal.”

“In October, the committee removed the key sentence citing global factors and suggested that the zero interest rate policy could be ended soon, depending on incoming data,” Bullard said Friday in St. Louis. “The market-based probabilities of a near-term end to the zero interest rate policy have increased.”

“You should retain your options to say this looks a lot stronger, the economy looks a lot stronger than we thought, therefore we’re going to go faster,” Mr. Bullard said on Thursday.

If the labor market tightens more than anticipated, or economic growth or inflation surges, that could make it necessary for officials to consider speeding up the pace of rate increases, he said.

Mr. Lacker said the Fed needs to avoid getting “stuck in a rut” that would impose a predetermined path on rate increases. He said he wanted to avoid the experience of 2004-06, when the Fed raised interest rates a quarter of a percentage point at regular intervals.

When we had a normalization in 2004 to 2006 we moved at the same 25 basis points per meeting for 17 meetings in a row. I am virtually certain that was not optimal monetary policy. That was a very mechanical approach to increasing rates. This time I am hopeful we can be more flexible and reactive to data.

“My main concern about post-liftoff monetary policy is that it not be mechanical the way it was from 2004-2006. In that sequence, we raised the policy rate 25 basis points at each meeting for 17 meetings in a row,” he said. “It turned out to be a global macro-economic disaster in the end. By the time we got up to relatively normal policy rates, the housing crisis was upon us.”

Washington Post: Let’s start with Friday’s [November] jobs numbers. Everyone is saying this is cementing the Fed’s liftoff in December. What do you think?

Bullard: I thought it was is a very strong report. I think the monthly average of 218,000 is very promising for the U.S. economy. I think it shows it was probably a mistake to delay from September, when people were concerned there was a slowdown in the fall. That hasn’t really materialized. I will argue for a move in December. I don’t want to prejudge what the committee might do, but that will be my position.

WP: An actual mistake not to move in September? What are the consequences, then? Is the Fed already behind the curve?

Bullard: The timing of the rate hike is probably not critical, and so we can certainly make up for the fact that we didn’t move earlier.

WP: You guys have been saying for a long time that it’s not just the first increase that matters: It’s the entire path. Let’s talk about what gradual means.

Bullard: There’s been so much pressure on this first move, and you can kind of understand it because we haven’t moved since December 2008. That’s seven years. We’ve been pinned down to zero. If we do move in December, it will certainly be momentous. It will be a great signal I think for the U.S. economy: It does signal confidence. It does signal that we can move away from emergency measures, finally.

But you’re right, the debate will immediately turn to how will normalization proceed? My main concern about that is we remain data dependent, and we do not get locked into a mechanical pace of rate increases the way that we did in 2004 to 2006.

In that sequence, for those that remember it, we raised the funds rate a quarter percent at every meeting for 17 meetings in a row. I’m virtually certain that was not optimal policy.

At the time, we were congratulating ourselves that this was a very organized way to go about the normalization process. But in the end, we really got burned with the huge crisis and a housing bubble that ran far out of control. And when it collapsed, it caused a major global macroeconomic disaster. So I don’t think we want to be in the position of trying to telegraph a mechanical rate hike path the way we did in that situation.

While central bankers typically “look through” oil price changes, “one circumstance where one may be more concerned is when inflation expectations themselves begin to change due to the changes in crude oil prices,” he said.

“Generally speaking, the markets and the committee are not thinking in terms of a January move,” Bullard said. “As far as March, we would want to get more information and see how things play out before we make a judgment.”

The recent sell-off in global equity markets, along with increases in risk spreads in corporate bond markets, may have made [the risk of asset-price bubbles] less of a concern over the medium term.

In his remarks, Bullard said communicating the policy path this way "could be viewed as an inadvertent calendar-based commitment to increase rates."

“Maybe we should get away from how many hikes we should do in a year,” he told reporters after his presentation. “You would like to move on good news about the U.S. economy, reasonably good economic growth, further improvement in labor market, confidence that inflation is coming back to path.”

“My preferred interpretation is that risk and liquidity premia associated with inflation compensation are relatively small with low volatility,” he explained. “Hence, I interpret declines in TIPS spreads as reflecting mostly declines in inflation expectations.”

Turning to the FOMC’s normalization strategy being predicated on an environment of stable inflation expectations, Bullard said this renewed downward pressure on market-based measures of inflation expectations during 2016 has called this assumption into question. “I regard it as unwise to continue a normalization strategy in an environment of declining market-based inflation expectations,” he said. “A decline in inflation expectations represents an erosion of central bank credibility with respect to the inflation target.”

The Wilshire 5000 – it was increasing at a rapid pace all through 2013, 2014, up until January 2015. If it had continued up at that same pace, we'd be sitting here talking today about a bubble in U.S. equities. That isn't what happened. It sold off. Now we're about 10 percent down from where we were January 2015. I think that's probably better pricing on U.S. equities.

We certainly look at the dollar as it impacts the US. The dollar is obviously a two or multi-player game where it depends what the other guys are doing. I think the main movement in the dollar was really during 2014 when they decided to do QE. It was the run-up to QE in Europe and that's the period where the Euro weakened substantially and the dollar strengthened substantially. That's almost all of the recent movement is due to that period from about May to December of 2014. Once they actually made the decision to do QE, the party was over. The dollar has strengthened a little bit since then, but mostly based on news.

"Markets got the idea that, well, once the Fed gets going there is no stopping us, like a train leaving the station," Mr. Bullard said Thursday in an appearance on CNBC. Of the tightening cycle of 2004-2006, Mr. Bullard said, "That doesn't sound data dependent."
So when the Fed moved rates 25 basis points higher in December, while insisting more hikes would be data dependent, "markets didn't see 25 basis points, which should have been a small move and should not have been important," Mr. Bullard said. "Instead they saw 125 basis points pulling up."
The Fed, beginning in December, based on its actions in 2004-2006, "didn't have credibility on the idea that we're data dependent," he said. Mr. Bullard said he now believes the Fed should get away from predicting how many rate increases might come in a given year.
“I worry that we somehow signal that we are on a freight train path.”

Prudent policy suggests edging the policy rate and the balance sheet toward more normal levels.

To this end, he then explored the implications of neo-Fisherian ideas that include the core idea that an interest rate peg, in some circumstances, can be stable. In this context, “ZIRP, far from being a harbinger of runaway inflation, would instead dictate medium- and long-term inflation outcomes,” he said. (For additional discussion, see Bullard’s speech on Nov. 12, 2015, “Permazero.”)

“You get another strong jobs report, it looks like labor markets are improving, you could probably make a case for moving in April,” Bullard said in a Bloomberg interview in New York Wednesday, in which he criticized the Fed’s practice of publishing officials’ projections on the path of interest rates. “I think we are going to end up overshooting on inflation” and the natural rate of unemployment, he said.
...
“We’re in reasonably good shape” with regard to monetary policy but “the odds that we will fall somewhat behind the curve have increased modestly,” Bullard said. “We are going to get some overshooting here in the relatively near term” on unemployment “that might cause the committee to have to raise rates more rapidly later on.”

Bullard said there was a “credible case” to be made to move in March. “We didn’t do it -- so now we can look at April and see what the data looks like when we get to April,” he said.

The Federal Open Market Committee kept interest rates unchanged last week and halved projections for how many times it would hike this year from four times in December after volatility in financial markets and weakening global growth clouded the U.S. economic outlook. Bullard argued that the forecasts, also referred to as the dot plot, contribute to uncertainty in financial markets.

“You really saw that over the first part of this year,” Bullard said, adding that he’s getting “increasingly concerned” about giving forward guidance through those projections. “I’ve even thought about dropping out unilaterally from the whole exercise.”
...
“I am not revealing my dot,” Bullard said. “I want to get out of the game of how many rate increases this year.”

I am not revealing my dot. I want to get out of the game of how many rate increases this year.

“It’s really hurting us that we’ve got this kind of alternate meeting thing,” Bullard said. “I think we should make all meetings ex-ante identical. You should have press conferences at every meeting. I’ve long been an advocate of this.”

“The state of the U.S. economy as of the March 2016 FOMC meeting was arguably consistent with December 2015 SEP projections. Yet, the Committee did not increase the policy rate at the March meeting,” Bullard said. “This state of affairs might be viewed as ‘time inconsistent’ in the macroeconomics literature. Financial markets may have trouble interpreting Fed behavior in the future if this is the case.”

The state of the U.S. economy as of the March 2016 FOMC meeting was arguably consistent with December 2015 SEP projections. Yet, the Committee did not increase the policy rate at the March meeting. This state of affairs might be viewed as ‘time inconsistent’ in the macroeconomics literature. Financial markets may have trouble interpreting Fed behavior in the future if this is the case.

There’s been a long time disconnect and I have been worried. I’ve said so on Bloomberg many times, that I’m worried that that gets reconciled in some kind of violent way where there’s a lot of turmoil caused in markets because of changing expectations of what the Fed is going to do.

So I think the Committee gives its best assessment in that dot plot of what they think is going to happen and — and where they think the policy rate is going to go. It’s not clear to me why the pricing should be very different from that, unless markets have a much more pessimistic view of the U.S. economy, which is certainly something you could — you could have.

But if you look at the forecasts in the private sector of how the economy is going to evolve, those aren’t, you know, materially different from what the Fed thinks.

So — so I’m not quite sure why — why we need to have this — this, you know, constant sort of disconnect.

Not only have we moved at all kinds of different meetings, we’ve actually had inter-meeting meetings, special meetings, and moved at those meetings. So you can do a lot of things. You know, I’m not saying we’re going to — you know, I’m planning on that or anything, but the Committee certainly reserves the right to make a move at any time.

Hays: You have a 2.5 — 2 to 2.5 percent GDP forecast.

Is there any concern on your part that the economy has stalled out a bit early in the year?

James Bullard: I wouldn’t be inclined to give it that interpretation at this point, especially with the fairly strong jobs reports that we’ve had. So probably it’s, again, residual uncertainty or residual seasonality in the — in the first quarter of the year, which we’ve seen quite a bit over the last 20 years and if it’s like past years, that will be made up, you know, in later quarters.

I have been concerned about inflation expectations. And when I talked in mid-February especially, you had the five year, five year forward TIPS inflation measures down below 1.5 percent. That got me, you know, kind of nervous and I — and I started to flag those.

Now, they have recovered probably back to December levels. And I find that comforting. But you’d actually like to see those numbers even somewhat higher than they are today. And because they reflect somehow the credibility of the Fed and its ability to hit a long run inflation target of 2 percent.
...
The inflation themselves have been stronger. The year-over-year inflation numbers have been stronger, PC core at 1.7 percent. So it’s definitely coming up toward the 2 percent target just as the Committee predicted. So this is one of the cross-currents here. You’ve got slow growth, but you do seem to get inflation moving back toward target.

Bullard told reporters before the speech that for the time being there is "obviously a pretty big gap" between the markets’ prediction for future rate rises and the Fed’s own and it was difficult to conclude who is more accurate.

“International headwinds affecting the U.S. economy have been widely discussed in global financial markets during the last several years,” he said. “Recent negative international influences on the U.S. economy appear to be waning.”

He looked at two factors that have been widely cited in the international headwinds discussion: global financial stress and the negative impact of a stronger dollar on U.S. gross domestic product (GDP) growth.

“Measures of U.S. financial stress indicate that stress has fallen off its peak earlier this year,” he said. Regarding the second headwind, Bullard noted that the dollar appreciated mostly during the second half of 2014, coinciding with the run-up to the European Central Bank’s quantitative easing program. “This appeared to have had a substantial effect on the net exports contribution to U.S. GDP growth during the winter of 2014-2015,” he said. “Since then, however, the effects of a stronger dollar appear to be waning.”

He [Bullard] said that even if the U.K. decides to leave, “the next day nothing happens” and the country will enter into departure negotiations bound to go “very slowly.”

“I also see the probability of an exit vote as having fallen somewhat recently,” Bullard told an audience at a monetary and financial institution forum in Beijing on Monday. “Because of these factors I feel it won’t influence the FOMC’s decision.”

So I think you can make a move without press conferences in this circumstance. I think for that first move, you know the one we did in December, there you probably wanted to have a press conference around that because that was our first move. Whether you have to do that for every single move, I think it is questionable.

"By nearly any metric, U.S. labor markets are at or beyond full employment," Bullard said.

Asked what sort of payroll number would justify a rate hike in June, he said: "I don't think I'd want to commit to a particular number. The labor market reports have many different aspects to them and you'd have to look at the totality of the report."

But he added that the general message from labor markets was that performance has been very strong.

"It would take a very dire report to undo all the charts that I showed you and say that the labor markets were not strong, all of a sudden," he said.

St. Louis Federal Reserve President James Bullard said on Monday global markets appear to be "well-prepared" for a summer interest rate hike from the Fed, although he did not specify a date for the policy move.

"My sense is that markets are well-prepared for a possible rate increase globally, and that this is not too surprising given our liftoff from December and the policy of the committee which has been to try to normalize rates slowly and gradually over time," Bullard told a news conference after speaking at an academic conference in Seoul.

"So my ideal is that if all goes well this will come off very smoothly."

Meanwhile, Bullard noted he had been critical of the Fed's "dot plot" summaries of policymakers rate outlooks recently, saying they may be giving too much forward guidance, removing the Fed's ability to make data-dependent decisions.

I think the May jobs report was, you know, a surprise to the downside, but I also think you need to look at the totality of the labor market evidence. Labor markets have been improving for a long time. Unemployment rate’s all the way down at 4.7 percent. This particular jobs number was not so great, but the other ones have been, you know, very good for a long time. So I think, when you look at the evidence all together, it’s still very strong on the labor market side.

I think there is a residual seasonality problem. The first quarter has been weak for many years in a row. You’d like to see that shown in the data in a bounceback in second-quarter GDP growth, and we’re not really sure at this point what that’s going to come out to be. So we’ll have to get more data on the second quarter. Tracking estimates are a bit low right now for the second quarter.

The other thing that I find a bit concerning is that if you take the last four quarters, including the current quarter – put in a tracking estimate for the current quarter and then take the last three before that – you only get about 1.6 percent growth or something like that, depending on exactly what numbers you put in there. And that’s pretty low. That sounds like, you know, below most people’s – even pessimistic people’s estimates of trend.

Inflation expectations measures have bounced back –with energy prices they have bounced back, but they’re still relatively low compared to where they were in the middle of 2014, before oil prices started declining. So I kind of thought, if you wanted to see some numbers that you thought were kind of satisfactory measures of TIPS-based inflation compensation, I think summer of 2014 was the last time that we saw that. And then it had gone down, down, down, down, down, and now they’re come back up. But they really have not come back up to the previous level. So I think they’re still pretty low.

The last time – these talks I was giving in Asia, I was using this number that the 10-year TIPS inflation compensation, you know, was on the order of 1.6 (percent), but then you have to subtract 30 basis points off that to get to the PCE inflation expectation. So it’s only like 1.3 (percent) over the next 10 years. So that’s a pretty low – pretty low inflation expectation. And then – you know, and that’s without subtracting any kind of liquidity premium or risk premium or anything like that.

So I would say that they’re too low. And I’m one that has put more emphasis on that argument, probably, than others on the Committee. Others will cite survey measures. The Committee will often put survey-based things in the statement. I don’t think the survey-based measures move around in a way that is responsive to economic conditions. It’s just kind of like – (chuckles) – you ask people, they give you the same number month after month. So…

Who knows – (chuckles) – what’s going to break just right in those days right before [FOMC meetings]? And then – and then if you feel like, well, I can’t – I can’t do anything right at that meeting, then you got to wait, you know, 90 days till the next meeting. I don’t think, you know, in an environment where you’re trying to normalize rates, that that’s a good approach. I think instead you should be willing to move and able to move when the data is fairly strong and you have a good case to make, and then you’re able to move at that particular meeting. So, basically, all meetings should be the same. They should all be considered exactly the same.

[The dot plot] should always be, you know, four quarters ahead, eight quarters ahead, 12 quarters ahead, you know, that kind of thing. It shouldn’t be 2016, 2017, 2018. But it’s just kind of convention over the years that we’ve always done it that way. But the horizon then kind of changes over time as you go through the year. You know, the first part only has six months left or three months left.

The Federal Reserve Bank of St. Louis is changing its characterization of the U.S. macroeconomic and monetary policy outlook. An older narrative that the Bank has been using since the financial crisis ended has now likely outlived its usefulness, and so it is being replaced by a new narrative. The hallmark of the new narrative is to think of medium- and longer-term macroeconomic outcomes in terms of regimes. The concept of a single, long-run steady state to which the economy is converging is abandoned, and is replaced by a set of possible regimes that the economy may visit. Regimes are generally viewed as persistent, and optimal monetary policy is viewed as regime dependent. Switches between regimes are viewed as not forecastable.

The upshot is that the new approach delivers a very simple forecast of U.S. macroeconomic outcomes over the next 2 ½ years. Over this horizon, the forecast is for real output growth of 2 percent, an unemployment rate of 4.7 percent, and trimmed-mean PCE inflation of 2 percent. In light of this new approach and the associated forecast, the appropriate regime-dependent policy rate path is 63 basis points over the forecast horizon.

While the real return to short-term government debt is low today, the real return to capital does not appear to have declined meaningfully. For this reason we prefer to interpret the low real rate of return on short-term government debt not as reflecting low real returns throughout the economy (as in a simple New Keynesian model), but instead as reflecting an abnormally large liquidity premium on government debt. It is this liquidity premium which is the fundamental factor. We sometimes refer to this conception of the low value of the real return on short-term government debt as r† (“r-dagger”) to distinguish it from the more commonly discussed r* (“r-star”).