James Bullard, Interview: Wisconsin Banker’s Association

Inflation Expectations

“But inflation is moderating in response to front-loaded and aggressive monetary policy in 2022. I would cite evidence on inflation expectations, which I think have been kept in check as we’ve tried to deal with this inflation shock by the aggressive monetary policy that we’ve employed.”

Inflation

“So that shows that the Fed’s policy has been able to keep inflation expectations under control and has returned inflation expectations to levels consistent with the 2% inflation target. And I’m now expecting actual inflation to follow behind and move down toward 2% as we go forward in the US economy … So we don’t want to replay the 1970s. We want to make sure that we’re moving inflation clearly back to 2%, and that means that the Fed is going to have to maintain rates at high enough levels to make sure that inflation is moving down and staying down on a consistent basis.”

“There’s probably too much optimism that inflation’s easily going to come back to 2%. That is not the history of inflation, but we can all still be hopeful.”

Fed Funds

And even with those generous assumptions, you get something north of 5% as being the lowest level of the policy rate that you could use to credibly restrict inflation and to return it to the 2% inflation target … So my preference would be, if that’s the appropriate level of the policy rate that we want to shoot for, then I think it would be appropriate to get there as soon as possible and get the benefit of downward pressure on inflation from the higher policy rate.”

“I think the most likely scenario is in fact that core PCE inflation, Dallas Fed Trim Mean inflation, core CPI inflation, those kinds of numbers will remain above 2%, and that means that the policy rate will have to be higher for longer in order to continue to put downward pressure on those types of measures of inflation.”

“I’ve liked the front-loading policy. I think if we want to get to the low 5% range, we should go ahead and move to that level, then we get the disinflationary impact of that now as opposed to some point in the future.  So I think the front-loading policy has served us well and would continue to serve us well going forward. I don’t really see any purpose in dragging things out through 2023.”

Quantitative Tightening

As far as the exact impact on rates, I don’t think anybody knows exactly what these are. If you look at the empirical evidence in the literature, it has a very wide range, distressingly wide range of estimates about what the true effects are. For those that want to argue that the policy rate does not to need to go as high, they might point to the quantitative tightening policy as a supplemental tightening policy that might be helping us. Others might say that the effects coming through that channel are relatively weak and therefore we have to do more with the policy rate and that’s definitely a live area for policy debate.

Recession

“As far as recession risks, I would say they have diminished some over the last 90 days or so as it’s become apparent that the fourth quarter was stronger than expected. And as we’ve got jobs reports that have been relatively strong, and the unemployment rate has stayed at a very low level and indeed ticked down instead of up. And so these are suggesting that the economy’s more resilient than we previously thought, and that the prospects for a soft landing have improved.”