{"id":110766,"date":"2009-12-23T14:50:46","date_gmt":"2009-12-23T19:50:46","guid":{"rendered":"http:\/\/blogs.wsj.com\/economics\/2009\/12\/23\/feds-bullard-too-early-to-change-extended-period-language\/"},"modified":"2009-12-23T14:50:46","modified_gmt":"2009-12-23T19:50:46","slug":"fed%e2%80%99s-bullard-%e2%80%98too-early%e2%80%99-to-change-%e2%80%98extended-period%e2%80%99-language","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/110766","title":{"rendered":"Fed\u2019s Bullard: \u2018Too Early\u2019 to Change \u2018Extended Period\u2019 Language"},"content":{"rendered":"

James Bullard<\/strong>, president of the Federal Reserve Bank of St. Louis<\/strong>, says in an interview with the Wall Street Journal that the economy is turning the corner, and while he doesn\u0092t see the Fed raising short-term interest rates in 2010, he wants to consider other steps to tighten policy if the economy heats up, such selling mortgage backed securities.<\/p>\n

“We might get 4% growth in the current quarter,” Mr. Bullard said. “That would be welcome and it would be stronger than the third quarter this year and hopefully it would set up some good momentum for the first half of 2010.”<\/p>\n

Mr. Bullard is a voting member of the Federal Open Market Committee<\/strong> in 2010, meaning he is one of five of the twelve regional bank presidents who get a formal say in the direction of monetary policy. (There\u0092s a regular rotation among bank presidents to decide who gets to vote every year.)<\/p>\n

He\u0092s an unconventional thinker at the Fed. While many other Fed officials believe that large amounts of slack in the economy will hold inflation down, he\u0092s skeptical of the idea. And while many focus on the level of interest rates, Mr. Bullard says the Fed should focus on using its balance sheet and its large holdings of securities to manage financial conditions.<\/p>\n

Here is what he said:<\/p>\n

WSJ: You become a voting member in 2010. What\u0092s your objective in terms of how you\u0092d like to influence the policy debate in the next 12 months?<\/strong><\/p>\n

BULLARD:<\/strong> I don\u0092t think voting is the critical element because of the way the committee works and has operated. Everybody is at every meeting. Everybody talks the same amount at every meeting. If you want to come in with important arguments that will sway the committee, you certainly have an opportunity to do that. And then at the end, everybody votes yes. You just have to make good arguments to get others to see it your way.<\/p>\n

WSJ: What issues would you say are going to matter the most to you personally in the months ahead?<\/strong><\/p>\n

BULLARD:<\/strong> At the upcoming meeting here we\u0092ll talk a lot more about the asset purchase programs and kind of play that going forward. I\u0092d like to see some kind of state-contingent policy where we keep our options open about adjustments to that program. If the economy comes in very strong we could sell assets at an appropriate rate or if the economy comes in weaker, we may want to do more with that program. I would see that as a quantitative easing program that is generally regarded as successful in supporting the economy and supporting the recovery.<\/p>\n

WSJ: It seems that the committee has set itself on a course to finish the program by the end of March. Do you see much will at the Fed to change the course that\u0092s been set?<\/strong><\/p>\n

BULLARD:<\/strong> There are a lot of questions about strategy going forward. On the Fed\u0092s balance sheet, normally we would hold Treasurys on the balance sheet and you would replace them as they mature. Now you have a very large balance sheet. Presumably you wouldn\u0092t replace the mortgage-backeds as they mature. That is going to lead to a decline in mortgage-backeds. Is that the right pace of decline? Or do you want to be able to adjust that, augment that with sales or mitigate that by purchasing some back or purchasing some Treasurys to replace those?<\/p>\n

WSJ: Would you describe yourself as a hawk or as a dove or as something else?<\/strong><\/p>\n

BULLARD:<\/strong> I started out saying I was a hawk and I very much see myself in that role. Inflation is very costly for the economy so I\u0092d be very reluctant to let inflation get out of control or do anything that would jeopardize our low and stable inflation rate. It took a long time to earn that credibility coming out of the 1970s and the early part of the 1980s and I\u0092d be loathe to give that up.<\/p>\n

WSJ: Core CPI seems to have stabilized around 1.5%. Do you think core inflation is still falling?<\/strong><\/p>\n

BULLARD:<\/strong> I don\u0092t really think so. That comes to this slack argument. I\u0092m 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\u0092ve 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\u0092d be in the former camp on this issue.<\/p>\n

WSJ: A very accommodative stance was put in place in part based on an anticipation of downward inflation pressure. If it is not the case that there is any more downward inflation pressure, does that support an accommodative stance?<\/strong><\/p>\n

BULLARD:<\/strong> That would indicate that we\u0092re starting to turn the corner that we\u0092ve staved off the deflation threat. I think if you had a central bank that was not as aggressive as we were and was more passive in response to the downturn that swept the globe in late 2008 and early 2009, then you really would have gotten declines in prices and you would have gotten deflation and possibly that deflation would have set in and become an equilibrium where everybody starts to expect declining prices. I think we\u0092ve avoided that outcome largely and we\u0092re starting to turn the corner and now the question will be how to avoid the upside risks, the medium-term inflation risks that we\u0092ve created with a very aggressive easing policy.<\/p>\n

WSJ: What\u0092s the hardest decision for the FOMC to make in the first quarter of 2010?<\/strong><\/p>\n

BULLARD:<\/strong> I think it will be how to set up the strategy for the asset purchase program. You could just say, \u0091OK we\u0092re done and we\u0092re not going to purchase any more.\u0092 Whether that is really optimal or not is really the question. What would be optimal about a policy like that? Should we be reacting to information as it comes in on the economy? You\u0092ve got two tools on the table. One of the tools is the interest rate instrument which is at zero and is projected to remain there according to the committee for an extended period. So it seems like you should use the other tool to adjust to incoming information as it arrives during 2010.<\/p>\n

WSJ: So you favor keeping the rate at zero and managing the balance sheet.<\/strong><\/p>\n

BULLARD:<\/strong> Yeah, definitely.<\/p>\n

WSJ: We\u0092ve had some stronger economic data in recent weeks. A number of the private economists we talk to have revised up their fourth quarter economic growth projections. How has your own view about the economy changed?<\/strong><\/p>\n

BULLARD:<\/strong> I\u0092ve been more optimistic. I think the Christmas season is coming in a bit better than some have anticipated and what I have anticipated. The anecdotal reports from around the district and around the country seem a little stronger to me. We might get 4% growth in the current quarter. That would be welcome and it would be stronger than the third quarter this year and hopefully it would set up some good momentum for the first half of 2010. And we got a still-bad jobs report, but much-less-bad than all of the previous jobs reports in the previous two years. So hopefully we might get some jobs growth in the next couple of months here that would be very good news indeed.<\/p>\n

WSJ: What is your outlook for growth and employment for the coming year?<\/strong><\/p>\n

BULLARD:<\/strong> I think we can grow at an above trend pace in the first half of 2010. And I think we\u0092ll see the jobs numbers start to turn positive in the first half of 2010. If you talk to business leaders, they\u0092re very reluctant to hire. They\u0092re very cautious. They\u0092re very cautious about their capital expenditures. But I think as they see the economy improving they\u0092ll be caught without enough workers and without enough capital expenditure and they\u0092ll have to revise up their plans.<\/p>\n

WSJ: Everybody wants to talk about the term \u0091extended period.\u0092 When does that issue become a subject for debate? You talked about the balance sheet which you say will dominate discussion for at least the next couple of Fed meetings. When does extended period come into play?<\/strong><\/p>\n

BULLARD:<\/strong> I suppose it\u0092s 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\u0092t even turned positive yet. So it is a little bit too early to be talking about raising rates. That\u0092s why I like to talk about other instruments that we can use and other margins that we can adjust on while we\u0092re waiting for the conditions to be right to raise rates.<\/p>\n

WSJ: One of the ideas that has gotten some attraction lately is the idea of raising the discount rate and thus to normalize gap between the discount rate and the fed funds rate which existed before the crisis. Do you think that would be a good idea?<\/strong><\/p>\n

BULLARD:<\/strong> At some point we\u0092ll want to return that to a penalty rate. Financial markets have improved enough that you could probably return that to a penalty rate.<\/p>\n

WSJ: Futures markets are showing a high probability that the Fed will start pushing up the fed funds rate by the second half of 2010. Does that sound right to you?<\/strong><\/p>\n

BULLARD:<\/strong> That isn\u0092t the way the committee has behaved in the past. I would say with the forecasts that are out there, unless the data came in very strong, we\u0092re probably not looking at that kind of scenario this year. It could happen but you\u0092d have to have very strong numbers on the economy. That\u0092s why I\u0092ve been talking about this other strategy and other instruments that we can use.<\/p>\n

WSJ: One of the ideas that came up in the FOMC meeting in November was that the Fed might want to sell down its MBS portfolio at some point.<\/strong><\/p>\n

BULLARD:<\/strong> 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\u0092t 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.<\/p>\n

WSJ: Do you think the Fed\u0092s balance sheet needs to start getting normalized?<\/strong><\/p>\n

BULLARD:<\/strong> As the economy improves, yes. We\u0092ve got to get it to an appropriate size at an appropriate pace. This is a lot, more than doubling the monetary base. I don\u0092t 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.<\/p>\n

WSJ: Would you support or advocate supplementing the natural runoff of the Fed\u0092s portfolio with sales?<\/strong><\/p>\n

BULLARD:<\/strong> I would like to look at it. I\u0092d like to have it 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.<\/p>\n

WSJ: How close are we getting to that point?<\/strong><\/p>\n

BULLARD:<\/strong> I don\u0092t think we\u0092re there yet. Of course, we\u0092re not even done buying yet. And we\u0092re going to have to see how the economy performs here in the fourth quarter and in the first quarter of next year. But I would want to be in a position to start thinking about it during 2010.<\/p>\n

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James Bullard, president of the Federal Reserve Bank of St. Louis, says in an interview with the Wall Street Journal that the economy is turning the corner, and while he doesn\u0092t see the Fed raising short-term interest rates in 2010, he wants to consider other steps to tighten policy if the economy heats up, such […]<\/p>\n","protected":false},"author":850,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-110766","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/110766","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/850"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=110766"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/110766\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=110766"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=110766"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=110766"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}