St. Louis Federal Reserve President James Bullard spoke with Bloomberg’s Brendan Greeley, Michael McKee and Tom Keene from the Jackson Hole economic symposium. He spoke about the outlook for monetary policy, the U.S. economy and recent market volatility.
Bullard said that while world financial markets are volatile, U.S. fundamentals are good: “I’m not denying it’s a volatile period. But let me say this. U.S. fundamentals look good….The key question for the committee, and no decisions have been made here, but the key question for the committee is 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 is going to be not very much.”
When asked whether he is worried about low Chinese Growth exporting deflation to the U.S., Bullard said: “Yes. The story that China growth might be slower than the reported numbers has been around for a long time. I am certainly hearing from CEOs who do business in China that it looks lower than the official numbers. But still that — I think that has been priced in the markets for a long time, and so it’s not that big a surprise, I don’t think.”
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On whether a move in September gives confidence to the markets, Bullard said: “I think it will be a good day when we make this first move. We’ve been at zero for six and half years, and I think it will signal confidence in the U.S. market.”
- Bullard says expects inflation effect from china not that big
- says slow China growth ‘no big surprise’
- says U.S. Fundamentals look good
- last 10 days shouldn’t change FOMC outlook much
- says it will be ‘good day’ when fed lifts rates
- says fed should be very gradual, data dependent
- Says lower oil prices generally good for U.S. Economy
- Bullard: I actually think we’re O.K. On inflation front
- Says jobless rate is down near natural rate
- Wages are lagging indicator, don’t predict inflation
- Measurement a ‘huge issue’ for productivity data
- H1 U.S. Growth now looks ‘pretty good’
- Looks like 2nd half will be better than 1h for U.S.
- Bullard: lower inflation expecations give me pause
- Tips declines are bit concerning
- Tools for raising fed rates should be effective
James Bullard: Full Interview
James Bullard: Fed Rate Raising Tools Should Be Effective
BRENDAN GREELEY: There is a lot to start with, but let’s go first to China which seems to have been causing a lot of the market volatility that we’ve seen earlier this year. Mr. President, you said that you were sanguine about risks from China.
JAMES BULLARD: I said I was more sanguine than the markets. So I thought that was kind of a low bar.
GREELEY: Well let’s look at what we’ve seen over the course of the summer. Are you worried about low Chinese growth exporting deflation to the U.S.?
JAMES BULLARD: Yes. The story that China growth might be slower than the reported numbers has been around for a long time. I am certainly hearing from CEOs who do business in China that it looks lower than the official numbers. But still that — I think that has been priced in the markets for a long time, and so it’s not that big a surprise, I don’t think.
GREELEY: Well that’s priced into markets, but what about inflation here in the U.S.? Are we going to see lower inflation because of prices lower in China?
JAMES BULLARD: I don’t — that effect is not that big because we just don’t have — our economy is big. We’ve got a lot of other things going on other than trade to China. So I think there will be a little effect there, but it’s not that big. And let me just say on the Shanghai Composite, the Shanghai Composite in the first part of 2014 for six months just round numbers, trading at about 2,000. By June 2015 it’s trading at 5,000.
And now it’s trading at 3,000. So the thing went way, way up, probably beyond anything that anybody could rationalize. And now it has crashed down, and it’s still up a lot year-over-year. So I am not quite sure that we should be putting quite as much weight on the Shanghai Composite as we have been.
MICHAEL MCKEE: And you have made it quite clear you’re in favor of raising rates now. And then we have the market volatility, which Fed officials tell us they’d like to look through. But in 2013, the taper tantrum, the Fed held off on moving because they said financial conditions had tightened. Well your own St. Louis Fed financial stress index, out yesterday, hit a three-year high.
JAMES BULLARD: Yes.
MCKEE: Does that give you pause about a move in the near future?
JAMES BULLARD: Financial stress index is up, the — of course the VIX is up. This — I’m not denying it’s a volatile period. It is a volatile period. But let me say this. U.S. fundamentals look good. Labor markets look good. We got strong reports on the economy, second-quarter GDP revised up to 3.7. I think we’ve got a good second half of the year coming. So I think the U.S. outlook still looks very good, and the key question for the committee, and no decisions have been made here, but the key question for the committee is how much of — 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 is going to be not very much because we’ve certainly got lower interest rates in the U.S., longer-term interest rates than we would have otherwise had. We’ve got lower oil prices. So those are usually bullish factors. On the downside, you might have higher credit spreads, higher volatility, maybe a stronger dollar. Those probably roughly wash out. And so you have really got the same trajectory that the committee is going to be looking at that we were looking at before. So why would we change strategy, which was basically liftoff at some point based on this volatility?
MCKEE: Would you argue that if you do move in September it gives confidence to the markets?
JAMES BULLARD: Well I think it will be a good day when we make this first move. We’ve been at zero for six and half years, and I think it will signal confidence in the U.S. market. Also let me just remind everybody we’re talking about a miniscule move off of zero, and the committee has a strategy of let’s get going on this process, but let’s be very gradual. And Chair Yellen has been really hammering this point, let’s be very gradual and data dependent, and we’ll work our way up slowly, depending on how the economy performs going forward.
GREELEY: What is your alarm bell level of core PCE, to borrow the Bunker Hill metaphor? What are the whites of their eyes?
JAMES BULLARD: Core PCE inflation?
JAMES BULLARD: Well inflation has been heavily affected by oil prices here, and oil price is another leg down. That’s — generally speaking that’s very good for the U.S. economy. We’re a big oil consumer. But it does affect our inflation numbers, and somehow you have got to look through the oil price decrease. One way to do it is to look at the Dallas Fed trimmed mean PCE inflation rate, and that has been very solid year-over-year, about 1.6 percent, right around in that area. And then I think as labor markets continue to improve, well that will go back up to two. So I actually think we’re okay on the inflation front.
GREELEY: Do you have a level at which you would say, absolutely we’ve got to move now? Is it two? Is it 1.8 of the Dallas trimmed mean?
JAMES BULLARD: Well I’ve been arguing we should get going, because interest rates, it’s not that we’re a little bit below normal. We’re all the way down at zero, so you have got to think about how is this going to play out over the next two to three years. And we’ve already mapped a course of very low interest rates, so those that want low interest rates, don’t worry, you’re going to get them over the next two years because we’ve mapped a very slow normalization process.
MCKEE: Is there a fundamental difference with the way inflation is being generated this time such that we will not see a rapid acceleration in inflation, particularly with commodity prices, oil prices where they are?
JAMES BULLARD: The committee is organized around the Phillips curve, and I have not been a big advocate of the Phillips curve, but you just have to recognize that that’s a lot of monetary policy, and that’s how people think. We’ve got unemployment down at most — at what most people would estimate as the natural rate. We’ve been getting good jobs report.
There’s no reason to think otherwise going forward. Unemployment is going to come down into the four percent range over the forecast horizon. Under conventional models that’s going to put upward pressure on inflation. Again, I haven’t been a big advocate of this, but a lot of people on the committee are a big advocate.
MCKEE: When does your model suggest that we’re going to start seeing it?
JAMES BULLARD: We’ve got — we’ve got inflation coming up over the next year. By the end of 2016 we’d be at two percent.
GREELEY: But developed economies all —
JAMES BULLARD: Above two percent.
GREELEY: And above two percent.
JAMES BULLARD: Yes.
GREELEY: I mean but developed economies all over the world have had trouble hitting that two percent target. Can we assume that physics is going to work the way it always has, and we’re just going to get to two percent?
JAMES BULLARD: And it has been a low inflation era, but I think the bet is that supply and demand will reassert itself here.
MCKEE: Labor markets do seem to be tightening somewhat, but we’re not seeing it reflected in wages. Has something fundamentally changed there?
JAMES BULLARD: Yes. Wages are a lagging indicator, so you can’t really look at wages as a way to predict inflation. I think that’s one thing to keep in mind. I think that wages will improve. Also we need better productivity in the U.S., and productivity has been very low.
So you just think of a simple model of wages it would be productivity growth plus inflation. And it has been equal to that over the last four or five years, but the productivity growth component has been so low that wage growth hasn’t been that great.
MCKEE: What’s happened there?
JAMES BULLARD: I wish I knew. I think we need to get better productivity. That’s the single thing that would improve the U.S. economy the most. You guys remember the late ’90s where we had a productivity boom in the U.S. It was excellent for the U.S. economy. If we could get that going that would be excellent.
I think one of the problems is that after the crisis we naturally, I think, after the crisis wanted to re-regulate the U.S. economy, because you naturally felt, well, a lot of things went wrong here, we have to change the rules. And that re-regulation process I think slows down productivity growth.
GREELEY: When you talk about productivity growth, does it give you pause at all that the traditional relationship between the business cycle, that mirror image in productivity growth that that’s broken down. Does that say to you that perhaps the models we’ve used in the past aren’t appropriate now?
JAMES BULLARD: I think measurement is a huge issue for productivity, and just like in the ’90s you have new technology coming online. You’ve got social media and other imponderables. How much is Twitter contributing to productivity? I don’t know. It seems like it is, but I am not sure if that’s really showing up in the data. So if you talk to somebody like Hal Verian out at Google, he will give the story about there’s all this productivity all over the place, but it’s not measured. So I think that remains a puzzle, and a good area for research actually.
MCKEE: Well are you concerned about data in general? You look seven tenths contraction in the first quarter was the initial print, and now we have growth much faster in the first quarter, revised up.
JAMES BULLARD: Yes. The first half now looks pretty good, and so that’s something I was waiting for confirmation of. We told a story about the first quarter that that was transitory. It looked like it was negative at one point. It’s now positive. Now we’ve got a 3.7 number for second-quarter growth.
That puts us the first half at a little over two percent. And it looks like the second half will be better than that. So I think we’re in pretty good shape, and again I don’t think this volatility — we’ll see how it shakes out. We’ll see. And it could shake out in a different way than I am describing it here, but I don’t think it’s going to affect the basic trajectory of the U.S. that much.
TOM KEENE: I wanted to jump in here. Jim Bullard, the reason I am not out at Jackson Hole is I couldn’t go unless the Pittsburgh Pirates, who are in first place, and that didn’t work out, the Cardinals doing better than good. I want to go back to your comments on the Philips curve from another generation, of course out of the London School Economics, you were out of the real world of Indiana University. If Stan Fischer and Janet Yellen are on a Philips curve model, what model would you suggest for the chair and the vice chair?
JAMES BULLARD: As you know, I put a lot of emphasis on inflation expectations. So let me just talk about that for a minute. If you look at the TIPS measures and inflation expectations —
JAMES BULLARD: — they’re down. I don’t know where they are today, but they have been down maybe 40 basis points on average across the different yields. That does give me pause, and I think is a concern, but a lot of that is driven by oil prices. They’re highly correlated with oil prices, and they shouldn’t be. And so for that reason, people on the committee, including me, put some emphasis also on survey measures, which have been more stable. So as long as we have these anchored expectations we’ll probably be okay. But I do find the TIPS declines a bit concerning.
GREELEY: President Bullard, we’ve talked a lot about the need to tighten a little bit, to move away from the current policy, but you have been talking this year about different methods for doing that. It’s not just about the Federal funds rate. It’s also about what’s paid on excess reserves. What are some tools that the Fed could consider as they look at policy next year?
JAMES BULLARD: Well we have a clear plan. It’s going to be interest on excess reserves at the top of the range. It’s going to be reverse repo at the bottom of the range. I think it will be a 25 basis point range. We expect Fed funds to trade in between these two, and I think those three rates will move up in tandem, so I think that will work fine, but we do need to see that once we get started on raising rates.
GREELEY: Over the last year, banks have been removing their excess reserves. We’ve seen about $200 billion leave the Fed. Does that say to you that that will be a less effective tool in the future?
JAMES BULLARD: Well $200 billion on the amount of excess reserves out there is not actually a big number. So it’s funny to say $200 billion is not a big number, but it’s not. So we’re going to have to use this method as long as we have super abundant reserves. And that’s the way it’s going to be, but I do think it will work as we try to normalize here.
MCKEE: Well are you going to cap reverse repo amounts, and if so, how much? A lot of people in the markets are worried that you’re going to become the repo market, private sector is going to dry up and everybody is going to take their money out of money funds and banks and put it at the Fed.
JAMES BULLARD: I think right around the time of liftoff we’d probably not put any cap on it — we — because we just want to see what happens. Later on we probably would make a decision on that and try to limit the size. Where we’re going to come down on that I don’t know exactly.
GREELEY: Okay, Jims Bullard — James Bullard of the St. Louis Fed, thank you very much.