Bullard: Job Gains Point to Earlier Rate Increases; Sees Dual Risk if Fed is Late in Raising Rates

By: Bloomberg | Fri, Aug 22, 2014
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In an interview with Bloomberg's Kathleen Hays, Federal Reserve Bank of St. Louis President/CEO James Bullard said, job gains point to earlier rate increases, "The evidence is leading toward an earlier increase that would have been in the works earlier this year. Labor markets have improved quite a bit relative to what the committee was thinking."

Bullard said he sees a 'dual risk' if the Fed is late in raising rates, "One would be inflation, but the other would be financial stability, and it's substantial."

Listen to the interview at Bloomberg Radio: http://www.bloomberg.com/radio


Full Transcript

KATHLEEN HAYS: You've been saying for a while that the first interest rate increase could come in March of next year. I think you first mentioned it, in fact, when we talked to you in St. Louis and we asked you about your dot. And now, the minutes released by the FOMC on Wednesday show that more people on the Fed are looking at the data and saying - maybe that first interest rate increase could come sooner. Is of consensus for you sort of the way that the majority on the FOMC starting coming around more to your view now.

BULLARD: I think the way that the evidence is leaning toward earlier increase than would have been in the works earlier this year, and that's because labor markets have improved quite a bit relative to what the committee was thinking and so I think, you know, to the extent there's a rethink on this as because of improving labor markets.

HAYS: And there's that kind of a rethink, is that what the minutes reflect?

BULLARD: The futures, I think last year, you know, at the June press conference Chairman Bernanke said that unemployment in the summer of 2014 would be seven percent and we'd be finished with QE. And what has turned out is that we are at 6.2 percent, and we are not done with QE. So, it's quite a bit different from where we were - what we would have been thinking what happened a year ago. And a lot of the improvement in the unemployment rate is, you know, is coming last six months.

You know, some before that, I guess. But - but, you know, and job growth has been over 200,000 a month, you know, this year.

HAYS: OK, so than that's what accurate (ph) read that, that the FOMC is rethinking broadly

BULLARD: Well, I can only speak for myself or you have to ask the other guy.

HAYS: True, but we did get the minutes, and you were at the meeting, and one of the reasons we get those minutes is to send us a belayed thoughtful message about where the FOMC is.

BULLARD: Well, you know, they are all here, so I think ...

(LAUGHTER)

BULLARD: You can ask them.

(LAUGHTER)

HAYS: Right. Well, let me ask you this. Another point raised in those minutes was some more - to certain some more discussion and some more people saying that they are getting less comfortable with having a forward guidance that says the key rate will be at zero four considerable period.

Is that the sense you get to - that there is more question of that on the FOMC and in your own mind?

BULLARD: Well, the considerable period language will have to be revisited at some point, and when, you know, I think to me the original intention, at least for my point of view of having that language in there was that when we ended the QE program, it didn't necessarily mean we immediately can turn around and raise interest rates. I think we wanted to have some breathing space in there so that we could look at the data and make a decision about what we wanted to do.

But as we get closer to the date where QE ends, then I think we have to think about what - how do we want to reshape our thinking on, you know, on this. You can't just keep saying considerable period forever.

HAYS: Well, do you agree that maybe a chip you dropped right now?

BULLARD: Well, I think it's something the committee will review in coming meetings, and I wouldn't want to prejudge where that's going to come out.

HAYS: Do you have any sense of what considerable period even means? Is it supposed to be in the six months or more than nine months? Or ...

BULLARD: You can ask other people in the committee what they thought, you know. Some of these things are a product of compromise on the committee, but for me I thought the intention was to make sure that just because QE ends, that doesn't mean that the next meeting, you know, we are going to turn around and raise interest rates. So, so I think it was to give some breathing room for the committee and allow us to assess a situation at that point.

Otherwise markets might have thought, well, you know, you are going to raise rates. You won't have anything else to do. You are done tapering, so now you are going to have to raise - raise the policy rate, and that's not been the intention of the committee.

HAYS: But there's no month like it has to be six months or three months or nine months. So, what - considerable period to be just about anything.

BULLARD: Yeah, I'd be very reluctant - I'd be very reluctant to put an express - an exact time frame on it, because it is very data dependent. And, you know, part of - part of it is that committee wants to have the chance to assess the data and assess the state of the economy.

HAYS: Are you still comfortable with looking for an interest rate increasing in March? Are you seeing anything that would signal, maybe, then, I need to move it up a little more quickly?

BULLARD: For now I'm sticking with end of March on my projection, and that's based on a second half of 2014 GEP growth rate that will be over three percent. A lot of - if you look at a lot of the tracking forecast, there are over three percent for the U.S. economy. Combined with the second quarter at four percent, and last year came in at three percent. So, really, I think we've got a pretty good growth track record and perspective growth outlook. It's just that we had that one first quarter that - that is puzzling everybody. But if you look at all the quarters around that, it's looking pretty good. And so, if we get more confirmation of that as we go through the fall, then I think we'll be in good shape for the end of the first quarter to think about raising rates at that point.

HAYS: You said recently economists are right to worry the Fed could fall behind the curve on inflation. It's the history of institution. Are you seeing signs of this now?

BULLARD: Well, it's easy for a central bank to get behind where financial market expectations are, and, you know, it's a bureaucracy and it had tense to be slow moving. And markets are fast moving, they are responding to current data. So, if the committee doesn't keep up with the data and keep up with the reality on the ground of the U.S. economy, then you can't get behind and the end - expectations can get away from you and inflation can get away from you.

I'm not saying we are there now, but monetary policy is a long way from normal, a long, long way from normal. It's not just like we're, you know, we kind of have some - some interest rates that look a little bit low. I mean we've been in zero for a long time here. And we've got the very big balance sheet. We haven't even stopped purchases yet, so, so I think we've got a lot of, you know, a long way to go on normalization and it's, you know, it takes a long time to get that whole process going and, you know, you want to be doing it in teeth (ph) of, you know, continually improving economy and I think we're getting that now, and so that we are in a better position to start that process.

HAYS: You know, I think you may be the only member of the FOMC who's been - been critical policy for being too tight and too loose. You are critical of the Fed and you dissented when it was allowing inflation to fall below the target, and not doing anything about it. So, it's a pretty big deal. And in fact, the minutes even include this special kind of caveat now that persistent below target inflation can do damage, and that really seems to have been - that occurred after your dissent. Now, you are a clear voice trying, it seems, saying to the Fed, you know, to the world - hey, look at the economy. It's improving. This interest rate increase, even saying (ph) is going to come sooner than people are looking for it.

How did you shift from - don't, don't dismiss low inflation, that's what my concern is to now looking at the other side and saying, we may have to raise the interest rate sooner and quicker.

HAYS: I did dissent on the dovish side last summer at the June meeting, and at that time, you know, inflation was running surprisingly low, and I felt at the time that we didn't' have a good explanation. I'm still - today, I'm not sure we have a good explanation for why inflation was as low as it was during 2013. But during 2014 here, you know, the readings have come back up. Some were still below target, and they are seem to be moving in the right direction, which is more consistent with what we've been thinking. And - and so, now - and plus we've got the dramatic improvement in labor markets, and so I think those - and we've got monetary policies way away from normal settings and so, those three things, you know, together make me think that maybe we should get started on the normalization process.

HAYS: Well, at least you've proven this. People can be wrong that everyone is a (inaudible) though, because you ...

(LAUGHTER)

HAYS: Fly with both wings.

(LAUGHTER)

HAYS: You have to.

BULLARD: Well, I try not to be, you know, sort of overly dogmatic, I try to look as carefully as I can at the - at the situation and think about where I can maybe improve based on where the committee is.

HAYS: This is a labor market conference, after all. Here at Jackson Hall and for years the Kansas City Fed has - had this uncanny knack, for like almost a year ahead picking a topic that when you get to August, it's like wow, right on. Now, Janet Yellen, the Fed chair, many times in speeches, in testimony has talked about labor market slack. And that there's too much of it, and there's too many people who have been unemployed for a long time. And it seems to link this to the Fed's ability to move slowly and let inflation get up to target. What - you - number one, you in the past in your own research have questioned this concept of labor market slack. What is your position on that now?

BULLARD: Well, I - you know, I've said many times. I don't think labor market slacks are good, a good way to organize your thinking about monetary policy. But, you know, I can appreciate that there are different views on that and I'm happy to hear that Congress have probably learned a lot on this issue.

What I felt in the past and what I've said in the past I'll just repeat here is that the theoretical underpinnings of slack are not good. There's a leaning theory out there, but the kinds of gaps that we look at are not the kinds of gaps that are in the theory, and so there's a mismatch there. That's one problem. And then, even if you don't want to worry about economic theory like I do, you just want to say look at the data, tell me what's related to what? So, you just run regressions of inflation on slack variables. The slack doesn't really help you that much. And so, I think this, you know, the kinds of mechanical relationships that sometimes get talked about in financial markets about slack, you know, don't really hold in the data. So, that's - that's another key problem. So.

HAYS: In a nutshell, you also, you and your team at the St. Louis Fed, one of your recent presentations, and I love the new - the Bullard point format you do now.

(LAUGHTER)

HAYS: Looking at unemployment and price stability and how close the Fed is to them, and your conclusion is that right now when it comes to unemployment the Fed is pretty much very close to where it needs to be. Is this - and this is another argument for why you think the Fed is much closer to meeting - go ahead and raise the rate.

BULLARD: Yeah, with inflation coming up this year and unemployment coming down pretty dramatically, we are quite close to our goals now. And I've felt that, you know, it's - we've - we've been at this low interest rates for such a long time that I think people, you know, sometimes they see the data, but they, you know, it might still be thinking 2011 or 2012 or something, but there's been a lot of improvement recently. Unemployment's only about 80 basis points off the committee's median guess about the sort of long run unemployment rate and - and inflation's only maybe six- 40 bases points away.

So, that's - that's actually pretty close by historical standards. We've certainly missed by far larger than amounts (INAUDIBLE) on both sides of the mandate. So - so I think we are much closer to goals and then combined that with, you know, the funds rate still 350, 400 bases points away from normal, way that committee usually moves, it would take a long time to get back up to even a normal level much less. Something that will be tighter policy, plus you get the balance sheet, you know, for a trillion - how we are going to get on the path to get that back to normal.

HAYS: Well, and yet there are certainly some signals, someone say would suggest there's - there's no hurry to move yet. Now, you've looked at ours work getting back the recycle pick and heading higher, so that's healthier labor market, but some say look at consumer spending, it's not accelerating, we've got confidence not, you know, back to - you know, expansionary kind of picks. And say this is potentially a sign that there's a low wage problem percolating in the economy. Is that a concern for you and is that a reason for the Fed to give it a little more time?

BULLARD: I think this is like, you know, this is (INAUDIBLE) story about today, but it's a story about possibly being on the position over the next two years, let's say, by moving too slowly. Because you are seeing economy that's growing in a reasonable pace, over three percent, on a potential growth rate that most people marked down to only a little over two percent, so three percent growth is above trend growth. And that's showing in a, you know, pretty clear improvements in labor markets. This is 200,000 a month, and I actually think if I've got my numbers right, it's been 200,000 a month since we launched QE 3. You can compare that to, let's say that 2004, 2003 or 2007 period, it wasn't that strong during that period, and that was a bubble. That was a bubble in the U.S. economy. So, you know, I think we are seeing good improvement in labor markets and that's, you know, part of what's driving us up.

HAYS: I'm sure you hear it, you see it in the paper, maybe someone says. This isn't a recovery. Like the people who are here in Jackson Hall, about a dozen who have come from various parts of the country, who've been unemployed for a long time or have - what (INAUDIBLE) work and have gotten jobs that have the salaries. One young woman I talk to with a master's degree. So, they are frustrated. They say the Fed doesn't get it. This isn't a recovery. And I think this wages in this weakness in a labor market. People working part time, because they can't find full time, is the reason why. What - what - how does the labor market look to you? Quite apart from - what it means for Fed policy? Has the world changed?

BULLARD: OK. Let me be clear. Let me be clear. I'm talking about after (INAUDIBLE) monetary policy. The very best that you can do. So what I'm suggesting is what I think would be the very best that you can do. And, you know, you look at 2004 to 2006. The Fed stayed too low for too long. I suppose we all slapped each other on the back about that. But boy, what a disaster. Total disaster. You allowed the housing prices to get out of hand. We told ourselves stories that - nothing bad was going to happen. They dropped by 30 percent. It was a global disaster.

So, you know if we are fomenting (ph) something like that again, that's not (INAUDIBLE). That's not going to be good for anybody. It's not going to be good for, you know, any of the categories you just mentioned. So, you know, I think it's important to keep in mind that there's, you know, there's more to really good monetary policy than just saying, you know, you have to keep interest rates low at every single juncture.

HAYS: So, are you saying, though, Jim, that that is the risk we - the Fed runs that we all run if the Fed moves too slowly and gets behind the curve?

BULLARD: I think there's a dual risk. One would be inflation, but the other would be financial stability, and it's substantial.

HAYS: Let's take a look about the bond market, because if you just took yields at face value, you know, you've had the ten-year note down around, 2.5, then 2.4. Even below 2.4 percent on the U.S. tenure Treasury note. They don't look to be worried about inflation at this point. Are they wrong?

BULLARD: They don't, but I think the source of the global bond rally is that there's a specter (ph) of the ECB coming in with a major QE program. I don't' have a sense of - if they'll do that or whether they'll do that, but that's what the market is thinking, partly because European inflation is coming at such a low level, only about 40 bases points on their latest reading, well below their inflation target. So, even - even though the ECB is just - has a single goal of price stability, it was a way below their goal, so.

It's a good question what their next move is going to be, but you can see that European yields have dropped dramatically, that German yield is under one percent. And that's dragged down global yields. So, I think that's a lot of what's been going on here. I would also say that on inflation in the U.S., I think there's a global factor in inflation. So, you know, part of what happens to our inflation rate is what else is going on around the world, and that those, you know, there's correlation across countries and inflation rates is pretty substantial. So, if the rest of the world is seeing downdraft in their inflation rate, than we will too. And so I think we are getting some of that effect. So, I actually think that this year, the fact that inflation has come up, even when global inflation has been following a bit is, is a sign that inflation is coming back to target in the U.S.

HAYS: Well, more - it seems - more and more numbers, you know, the economic numbers on your part are not getting better. They seem to be getting worse. More bad numbers out of Germany. And one of the guests on my show recently, and how could the Fed move now? How could the Fed signal? Even signal a move to raise the rate at a time when you've got the Ukraine-Russia conflict and the sanctions, and Europe getting weaker. This wouldn't be prudent. Of course, the Fed wouldn't make a move at a time like this.

BULLARD: Well, I don't know what your guest was thinking, but let me just paint the picture the opposite way. U.S. is growing at three percent, unemployment has dropped a point over the last year. Job growth is a real bust, and they are a long away from normal. They should get going on normalization, and then for Europe, you know, they might look to additional stimulus, although, you know, and I have advocated QE for Europe, and then it seems like you get the exchange rate movements in the direct - at least, pressure will go in the direction that you want, given that situation, a slowing Europe and a growing U.S.

HAYS: So, what about Japan? I just want to ask that because - I know you for years, that's an area you studied, you studied their monetary policy, Obanomics is underway. Is it working? Is Japan on the right track?

BULLARD: Well, we are going to hear from the Bank of Japan here. AT this conference I'm anxious to hear what Governor Corrodo (ph) has to say, and, you know, it's been a bold experiment and they just went through key piece of it and want to erase the consumption tax here in the spring. So, I think the jury is still out even after everything has happened. They have managed to move inflation expectations higher after decades of not being able to do that, and that's impressive. So, maybe they will - break out of it, but I don't think they are out of the woods yet.

HAYS: It is - are you past a point, is the Fed past the point of having any concern about emerging markets at the time the move is signaled by the Fed?

BULLARD: Well, of course, that's always a concern and the last year's Jackson Hall conference was practically the whole conference as far as I could tell was - was about emerging markets and the effect of U.S. policy on emerging markets. So, I have talked about that in speeches. I do think that you can sketch a theory that would have - that would support the views of emerging markets. I tried to do that in a couple of speeches, but still I'm - I come to the conclusion that really, the U.S. has to run monetary policy for the U.S. and the foreign economies have to run their monetary policy for their economies, and there's no real better answer to that right now than - than that. I have worried that because we are doing so many unconventional things in the U.S., that it's hard for those outside the U.S. to read the signals about the U.S. monetary policy, and that has maybe complicated the global equilibrium more than we used to pre-crisis. So, I think that's - it's a long rambling answer ...

(LAUGHTER)

BULLARD: But that's a - but I have thought about this issue partly in response to last year's checks and home meeting.

HAYS: Exit strategy, the last minutes noted that the Fed's - he's talking about this. What - at this stage, it's probably not too early, because if you are right, and the interest rate gets raised in March, and the taper is done, people are going to be wondering more and more about the quote/unquote exit strategy, and particularly in the bond market, because it could potentially has a big impact on them. What are some of your early thoughts? Do you know, have any definite idea or even hypothesis about what's going to be important? Then what you would suggest as a bunch of tools or paths?

BULLARD: The committee has - has been thinking about this issue, and has been making preparations, the stuff has been thinking about this issue, relief for a couple of years, but - but we've intensified that effort recently as we get closer here, to the time when we might actually raise rates. So, I think we've got a good set of tools that we can use. We have interest rate on access reserves. We have a federal fund's market, which is a mere shadow of its former self, but I think - I think we can maintain some of the focus on the federal funds rate on the grounds that that's the usual rate that we've used to communicate to people. And then we've got this reverse - overnight reverse REPO facility, which I think all set a floor under the Federal Fund's rates.
So, if we can move those three rates in tandem, then I think it will be pretty clear signaling to markets as to where the Fed stands and where short term interest rate stands. So, I think we are in pretty good shape. There are risks we don't - we've never done this before, so we don't know exactly how to work, but I do think they are wearing pretty good shape. I think we will maintain a focus on the Federal Fund's rate, even though that market is not really very robust at this point.

HAYS: Depending on how you read the minutes that were just released, you might see a reluctance to use the reverse REPO facility. The minutes used the phrase, quote, "temporary use on limited scale. How are you going to target the Fed Fund's rate successfully without robust use of the reverse RP facility?

BULLARD: Well, I think with a limited program, you still set a pretty solid floor under the Federal Fund's rate. And we are talking about range, at least in my mind, between AOER and the overnight reverse REPO rates of 25 bases points. So, I don't think it would have to be you know, that large of a program, possibly several hundred billion would be enough to set a good floor there, and then that fund should trade in between those two rates. So, that's what I'm expecting, at least as of right now. If we wanted to, you know, if that didn't work, the committee could revisit that and increase the size of program if we thought that was necessary.

But I think there's a sense from, you know, on the committee and maybe myself as well, that, you know, we kind of want to keep the optional open, at least get back to normal someday, where you'd be back to a lower reserve environment, you'd be able to target the Federal Fund's rate as we have done historically and successfully. And that that would be the way we would operate. But we can't operate that way in this very high reserves environment, so that's why we've got these other tools.

HAYS: Well, there's a lot of things that have changed, it seems, it's been an extraordinary five or six years, hasn't it?

Can monetary policy, can the Fed kind of ever go back to where it was now? I mean is this - we are in non-treaded waters, you've done things you've never done. You are going to do more. Is it going to be, you know, a world that, you know, you don't go back, you don't' just say, OK, now we just target the funds rate, thank you very much. But there's new tools. And in fact, some would say, a very activist Fed, a Fed that controls a lot more than it used to. Can the Fed back away from that now?

BULLARD: Well, I think it's - it is the time of change for central banking around the world and I think it's unpredictable at this point, whether we'll be able to, you know, go completely back to normal defined as, say, the 1990s, or the 2000s. You know, there may be permanent changes in central banking.

However, I would just stress that the only thing that Central Bank can do in the medium term in the long run is control the price level. So in that sense, I think, you know, the fundamentals haven't changed, but how we go about that and conceptions of what - (INAUDIBLE) monetary policy look like - looks like might be changing.

HAYS: OK. I guess my final question, because I'm thinking of baseball, and I'm thinking of the Cardinals.

(LAUGHTER)

HAYS: To get back to where we started. If this were a baseball game? OK? What inning is the Fed in when it comes to monetary policy?

BULLARD: Well, it's not a baseball game, because you've got - you've got incoming data and you've got to react to the incoming data, so it's, you know, baseball game is delineated by the outs that have to be made in order to define the end of the game, and so I think it's not really right think in those terms.

HAYS: So, but let me ask you, so - but you - I get the impression of - you're pretty convinced of your forecast. If the data disappoint, are you going to back off from that March forecast?

BULLARD: Well, I have a history of shifting views and response to the data and so, I think it wouldn't be a good day, if we got weak data and we had to do that, but - but I have changed in the past, and, you know, it'd be - keep an open mind on that.

So, a lot of what I'm saying is just that, you know, tracking forecast of GDP are over three percent for the second half, we've got all this improvement, 200,000 jobs a months. The tracking says that they'll continue through the whole year here. Unemployment will probably be down with the five (ph) handle not to - not too distant future. Do we really need to be at rock bottom on policy in that kind of environment. I don't know.

HAYS: I think we are saying this - no, we don't.

(LAUGHTER)

BULLARD: But it's possible, of course, it's always possible that data comes in completely different way and, you know, there's ( INAUDIBLE) and they just sent back, right? Oh something, but that doesn't work. People are expecting right now.

 


 

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