James Bullard, President of the Federal Reserve Bank of St. Louis, spoke with Bloomberg Radio’s Michael McKee and Kathleen Hays today about the state of the U.S. economy and Fed policy.
James Bullard said policy makers should raise interest rates as the economy improves: “We need to get going once we have the opportunity to get going…We’re basically going to be right on our employment target and right on our inflation target in the not-too-distant future, and but when you look at policy itself, we’re still in emergency settings….Why aren’t we getting policy back to normal if the economy is getting back to normal?”
Bullard said that low rates could inflate asset price bubbles: “Interest rates are zero. So you’re running very low interest rate policy into the boom phase of the business cycle…that kind of thing is a recipe for asset price bubbles and for a lot of mischief to happen…I think we should be hedging our bets in the direction of let’s try to get going and shade, hedge our bets against any kind of asset price bubble forming.”
Interview highlights and transcript below.
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James Bullard: Fed’s Base Case Is for Rate Increase in 2015
- 1Q GDP may get revised downward as negative
- Growth bounceback won’t be as big as last year
- Fed’s base case is for rate increase this year
- Thinks inflation to keep moving toward 2% goal
- Monetary policy has long lags
- ‘we definitely want to normalize policy’
- Labor markets still quite strong
- Appreciates markets moved back liftoff date
- Headline inflation YOY rate expected to move up
- Wants to normalize rates barring setback
- Jobs numbers are very good, expected to continue
- Sees unemployment in 4%-range in coming months
- Low rates, low joblessness may form asset bubbles
- Appropriate interest-rate setting ‘is not zero’
- ‘We need to get going’ tightening when appropriate
- Fed trying to be good starting its rate intentions
JAMES BULLARD: If you take the quarterly GDP numbers and you run them through a seasonal filter, you are going to get seasonal factors that shouldn’t be there because this is supposed to be the seasonalized data. So I think we’ve got to view the first-quarter numbers as a little bit suspect.
Last year we looked through the number and we did get very strong growth in the second and third quarters. So we’ll see if something similar happens this year.
KATHLEEN HAYS: Macroeconomic advisors right here in St. Louis, they’re tracking a number for second quarter GDP as two percent. That’s not bad, but after a flatter negative quarter, you still don’t have a lot of growth in the first half of the year.
JAMES BULLARD: Yes. I don’t think — the bounce back won’t be quite as big as it was last year, but if you recall what happened last year is as we went through June and July, more and more good data started to come in for the second quarter. And by the time we were done, we were talking about four to five percent growth for the quarter. So we’ll see if that — I don’t think we’ll quite get that this time, but it’s the pattern. And again you’re talking about residual seasonality here.
So if the pattern follows, as it did last year, you would expect that data to accumulate as you go through June and July. But for policy I think we need that confirmation. We have to see that in order to be sure that the — the first-quarter number was not as weak as it might have initially appeared.
MICHAEL MCKEE: Well barring a data surprise with Chair Yellen saying last Friday that it would be appropriate to raise rates this year, should we assume that the Fed’s base case is for a rate increase in 2015?
JAMES BULLARD: I think the base case is for that, because when you look at the economy overall, 5.4 percent unemployment, underlying inflation, one and a half percent or something, these numbers are not very far from normal for the U.S. economy. I mean inflation is low, but it’s not that low. And we did get a stronger CPI, a core CPI just recently.
So I think inflation will move back toward target. Unemployment will continue to fall. We’re basically going to be right on our employment target and right on our inflation target in the not-too-distant future, and but when you look at policy itself, we’re still in emergency settings. We’re — we’ve got policy rate at zero. We’ve got a huge balance sheet. Why aren’t we getting policy back to normal if the economy is getting back to normal?
And there are long lags. There are long lags in this process, so you can’t be — you can’t be saying that we’ve going to get all the way back to perfection before we even start to normalize policy. I think that’s too much. So the base case is definitely that we want to, at least for me, is that we definitely want to normalize policy, but we do have to get by this issue about the first-quarter GDP.
MCKEE: Well does that mean that June is essentially off the table, given that we’re only going to start getting some revisions now and they’re supposed to be negative? we’re told it’s still a possibility, but really?
JAMES BULLARD: Well labor markets have continued to be quite strong. We have another labor report here. The joy of data-dependent policy is we don’t have to make a decision until we get to the meeting and we actually have all the data. So let’s wait and see when we’ve got all the data.
But I appreciate that markets have moved — moved the start date back for the normalization process, because we said we’re data-dependent. And the data has been weaker in the last couple months. So that’s fair. That’s totally fair.
HAYS: Sure. So, Jim, I just want to take a look at the inflation target. You said how it’s moving back towards target. If you look at year-over-year CPI, which my colleague and I, Steve Matthews from our Bloomberg print team, who is here with us as well, you have got the year-over-year CPI on the headline at 0.2, and you’re — you’re a big proponent of the 0.2. That’s a long way.
And of course the official target, the headline, 0.3. The cores are moving up. But with inflation at this low level, is that one more thing that allows Jim Bullard, who has said recently you would have already started raising interest rates, and that even Jim Bullard to say I can wait because inflation is so far from target that there is no rush?
JAMES BULLARD: Well what’s going to happen with headline inflation is that because oil prices have stabilized and inched up some that the year-over-year rate will start to move up. And so I’m expecting that to happen as we move through the year, but we’ll keep an eye on that.
If you try to strip out the effects of inflation on the inflation, effects of the oil prices on the inflation rate, you could use core. That’s — core is probably not the best way to do it anymore. I don’t know why we do core. And that got started a long time ago.
JAMES BULLARD: What you should do is use the Dallas Fed’s PCE trim mean. And that has been pretty stable over the last year, and I think will start to move back up to target. And that’s running around 1.6 or so.
MCKEE: Well if you see the data continue to come in about as they have been, is that going to be good enough for a rate increase, a policy move by September? Or do you need to see an acceleration from where we are over the summer?
JAMES BULLARD: I think, again, I think our base case is that we would like to normalize, or at least I would like to normalize. And that’s what I will be arguing for and supporting. As long as we don’t have some indication that the economy is slowing down in some unanticipated way, I would be supportive of — of getting started with the normalization process, because we have a long, long way to go.
HAYS: At the same time, the bond market seems to be saying September is the earlier, and this could be as late as December. A number of Fed watchers who have been watching the Fed for a long time have the same view that you may get a rate increase by the end of the year, but in all likelihood will not have a move for them because the economy is improving, but there’s just not that much oomph.
JAMES BULLARD: No. I don’t think they’ve got it right. I mean the jobs numbers are very good. And I expect that to continue through this year. And I expect unemployment to continue to decline. So what’s going to happen here is in the next six months or so, maybe eight months, we’ll be down in the four percent range on unemployment.
And four percent handle on unemployment for the US. economy is essentially boom times for the U.S. economy. It doesn’t get any better than that. And the thing is interest rates are zero. So you’re running very low interest rate policy into the boom phase of the business cycle.
I’m overstating it to make my case. But that kind of thing is a recipe for asset price bubbles and for a lot of mischief to happen. And we’re — again you have to think ahead over a two-year horizon. And what we’re basically looking at is very strong labor markets and very low interest rates, even if we get started to normalizing, right?
And I think that that could lead to asset bubbles if we’re not careful. So I think we should be hedging our bets in the direction of let’s try to get — once the data come in in a satisfactory way, let’s try to get going and shade, hedge our bets against any kind of asset price bubble forming.
MCKEE: Well you say we have a long way to go. You say we got coming up unemployment in the fours and growth in the threes. What’s the appropriate policy setting for those levels, and what’s your neutral rate?
JAMES BULLARD: Yes. Well it’s — the appropriate setting is not zero. That’s the point. Exactly where we should be I think we can all argue about that, but if you look of the Taylor-type rules, they definitely tell us to be higher than we are today. They tell us we’re behind schedule relative to where we should be. You can argue about whether those are good guides for policy in the current environment or not, and that’s fair. But certainly by rules of thumb that have served us well in the past, it looks like we’re — we need to get going once we have the opportunity to get going.
HAYS: Jim, a lot of commentary comes from the Federal Reserve about the bond market, and communicating carefully what’s going to happen, some concern that the bond market could react, spiking yields or something. Is that a concern of yours? Has the — has the Fed become too concerned about ruffling the bond market’s feathers?
JAMES BULLARD: Well I don’t know if we’re concerned about it. We — under the new transparency doctrine we try to be as — as good as we can be on this. And I think when we inform markets of our intentions as best we can, and Chair Yellen does a great job with this, and Vice Chair Fischer is also great, and if at that point people are still surprised when we make a move, they’re going to have to suffer in market. So we’re trying to be as good as we can be in stating what our intentions are and where the committee is thinking.
MCKEE: So this is going to be well-advertised then when you’re ready to go.
JAMES BULLARD: Yes. It’s well, certainly well-advertised. I do think that there are traders out there in global markets that are way out in the tail that think that this is never going to happen. It has been six and half years at zero, so they’re going to bet on zero even further, and that when we do move they’re going to have to re-price, but what can I do?
HAYS: Well there’s a lot of people —
MCKEE: Well we’ll ask him about it in a moment.
HAYS: A lot of people, youngsters have never gone through a cycle like this.
MCKEE: Well we’re going to say goodbye to our viewers on Bloomberg TV.