James Bullard, President of the St. Louis Federal Reserve Bank, told Bloomberg Television’s economics editor Michael McKee today that the Fed should consider delaying the end of QE.
Bullard said, “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. So…continue with QE at a very low level as we have it right now. And then assess our options going forward.”
James Bullard: Fed Should Consider Delay in Ending QE
MICHAEL MCKEE, BLOOMBERG NEWS: And we’d like to thank President Bullard for coming in this morning.
And I want to go straight to the question on everybody’s mind. You’ve got global growth concerns. You’ve got a collapse in inflation expectations, oil prices down and markets extremely volatile now. Is there a role for the Fed? Is there something the Fed should do to address this?
James Bullard, PRESIDENT, ST. LOUIS FED: Plus the Cardinals lost.
MCKEE: Plus the Cardinals lost. I’m sure that the Fed has a lot of power over that.
James Bullard: U.S. macroeconomic fundamentals remain strong. And I think the U.S. macroeconomic forecast remains intact based on the data that I have today. So I still think we’ll get three percent growth in the second half of the year. I still think we’ll be over three percent next year.
I also think there are bullish factors coming out of this market selloff that are good for the U.S. economy. Lower long-term rates in the U.S. is usually a bullish factor for the U.S. And lower oil prices is a powerful incentive for the U.S. I think those are feeding into an already strong U.S. economy.
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. So –
MCKEE: In other words continue with QE.
James Bullard: Continue with QE at a very low level as we have it right now. And then assess our options going forward. So I think if it was just me on the committee I’m just one person, but if it was just me that’s one of the things I’d think about at the October, upcoming October meeting.
MCKEE: Well, you’re at $15 billion. You’d keep that level? That wouldn’t add very much stimulus to the economy.
James Bullard: No. But it would keep the program alive. And it would keep it, keep the optionality for the committee open as to what we want to do going forward. If the economy is still is as robust as I’m describing it, then I think we could just end the program in December, but if the market is right and it’s portending something more serious for the U.S. economy then the committee would have an option of ramping up QE at that point.
So I’ve been a – I’ve a long time been one that says that the QE program would be open ended, and that we would be able to adjust it in response to macroeconomic development. This is a serious macroeconomic development. It’s primarily coming out of Europe. It’s just that Europe was expected to have a good year and they’re not. And so growth prospects there are looking bleaker than they were. And the disinflation and even inflation outlook for Europe is not looking good. So this is a development that’s occurring in Europe, but it’s affecting U.S. markets.
MCKEE: Well, you think the U.S. economy is going to be strong. And so are the markets wrong to be selling off the way they are?
James Bullard: Some of the selloff would make sense and because a lot of U.S. multinationals have important fractions of their business outside the U.S. And so if you thought that the global outlook was worse than previously then it would make sense that some U.S. stocks would be marked down on that basis. So I wouldn’t worry about that part. That part seems to make sense.
MCKEE: Now the follow-on would be what do you do about interest rates. You’ve been in the camp that says you raise rates sooner in 2015, maybe even the first quarter, but are you lower for longer if you want to keep QE going?
James Bullard: Well, as I say I think the forecast for the U.S. based on the data I have today remains intact. I think the tracking forecasts are still strong for the second half of 2014. I’ve still got three percent or better for 2015. Labor market data has been very good. The last jobs report was very good. Unemployment is down in the five range. We’re only a couple jobs reports from being at normal levels of unemployment.
So all of that still looks like it’s on track. But I’m willing to acknowledge that this is a serious development in the global situation with the situation in Europe, so that we could invoke our data dependence clause on the taper and at this juncture.
MCKEE: But you would still see a first quarter rate increase if things normalize?
James Bullard: Yes. I mean to get me to change my rate forecast increase you’ve got to get me to change my forecast. And so as of today I wouldn’t change the forecast. If – a lot of people in markets are saying, well, global growth is going to be much weaker and this is going to spill over to the U.S. And so if that kind of a scenario develops and then I would change my forecast, and then hence change my outlook for the first rate increase.
But I don’t really see that happening as we sit here today. What I see is a fairly strong U.S. economy that will now be pushed ahead by some bullish factors, lower long-term rates and lower oil prices. And but I think the central bank, the policy committee should be cautious about the decline in inflation expectations, which is a serious matter.
MCKEE: What’s causing that? Your forecast, the committee’s forecast is for rising inflation to your target.
James Bullard: My forecast is for rising inflation. That’s why I’m concerned about declining inflation expectations, the five-year TIPS in particular has declined below one and a half percent. The five-year forward is down from