James Bullard, Speech: Financial Stress and the Current Macroeconomic Outlook

Banking Crisis

“I think the overall message here is that we do have macroprudential policy tools which have been deployed. They can contain financial stress while appropriate monetary policy can continue to put downward pressure on inflation. So we do have tools to do both. We’re deploying those effectively and I think we’ll be successful.”

Inflation

“The last thing I want to say on financial stress is that the Fed has been raising the policy rate over the last year to combat the highest inflation in the US since the 1980s. The inflation problem is real and is large, and I would just say anytime that you do this, even with a lot of forward guidance … you can’t really expect every entity in the financial world to adjust appropriately to the higher interest rate environment.”

“So I think we have a lot more momentum than previously thought coming into this year, and that’s going to make the inflation problem harder to handle.”

Inflation Expectations

“Some good news for you, inflation expectations are relatively low. So inflation expectations in literature on macroeconomic theory, it says that inflation expectations affect actual inflation. So the way you can think of this is that if businesses are making pricing decisions, they’re kind of trying to think in their head about, “Well, how much do you think prices will go up over the next six months or the next year?” And then they’re trying to price their product appropriately given that expectation that’s in their head. But these expectations have come down because of the Fed’s policy and that bodes well for the disinflationary process in 2023.”

“The five-year inflation expectation was near 3.5%. That’s not good. Those should always be close to 2% … these inflation expectations have come back down under 3% and to levels that are more consistent with the Fed’s inflation target of 2%. So this bodes well for disinflation in 2023.”

Interest Rates

“It’s true that the financial stress can be harrowing. Things happen very quickly. Information is flying around in financial markets, but financial stress also reduces the level of interest rates typically, and lower rates in turn tend to be a bullish factor for the macroeconomy … There is some self correction going on here that this would mitigate some of the negative macroeconomic fallout that might otherwise occur in the aftermath of a period of financial stress. So there’s kind of a natural mechanism at play here … In particular the 10 years were a real benchmark yield and is down about 50 basis points. That might help us a little bit going forward. So a little bit of a silver lining.”