James Bullard, president of the Federal Reserve Bank of St. Louis, said he would push at the Fed’s upcoming two-day policy meeting (April 26 and April 27) to reduce the central bank’s quantitative easing program by $100 billion, but held out little hope of being successful.
“I don’t always get my way on the committee,” he noted in an interview with the Wall Street Journal. Most Fed officials want to carry the program through to its end in June. “Any changes that we’re going to make we’re going to have to make at this meeting,” he added.
Bullard’s position is not news. At least he admits the Fed is not likely to follow his suggestion, so I give him credit for providing proper guidance. Still, his logic is interesting:
Mr. Bullard was elaborating on comments he made last week about the Fed’s $600 billion program of U.S. Treasury securities purchases. When the Fed launched the program last November it had lower forecasts for growth and inflation, he said.
“We got a stronger economy and we got higher inflation and higher inflation expectations than we expected at the time,” he said. “The logical thing to do is to pull back.”
Bullard seems to be saying that we need to end the program early because it is working. The majority of the majority will view it otherwise - don't mess with something that is working. Consider also the Fed’s projections last November and at the end of January:
The longer run projections were virtually unchanged. For 2011, the GDP forecast is about 0.4 percentage points higher than the November forecast – an improvement, to be sure, but nothing to write home about. The high end of the core-PCE range was pulled down – in other words, the Fed was less confident on the inflation outlook in the immediate wake of QE2. The unemployment rate is likely to come down sooner than anticipated – but this is arguably because of lack of re-entry to the labor force. Labor force participation remains stubbornly low.
In essence, we can argue that we are moving a little faster toward the long run projections than prior to QE2. Evidence that the program is working as intended, but not more so than intended. Bullard may be hinting that internal forecasts suggest dramatically better growth, but the Fed’s forecast was already better than private sector forecasts, and those will likely come down a tad with a weak first quarter. Indeed, at best I see the path of data has the potential to generate the Fed’s forecast. Still, I would add that the labor market is not yet signaling growth vastly above potential growth, which means the Fed’s forecast still imply more trend reversion than seems likely or than the private sector expects.
Regarding higher inflation, he could be referring to headline inflation, but that means he is confusing a relative price change with a general price change. Monetary policymakers should not be confused about this distinction.
Moreover, I am not sure there is room to be unhappy with inflation expectations. They seem to have moved back to exactly where they should be:
You could point to surveys that signal rising near term inflation expectations among consumers, but ask them if they can get higher wages to compensate. Wait, someone has. From the Reuters/University of Michigan survey March press release:
Just one-in-four consumers expected their financial position to improve during the year ahead, returning to near the lowest level ever recorded of 20%. Scarce income gains as well as rising food and gas inflation were responsible for these dismal financial expectations. Only 38% of all households expected income increases in the year ahead, the smallest proportion ever recorded. Just 11% of all households expected inflation-adjusted income gains during the year ahead, barely above the all-time low of 8% in 1980.
If I remember correctly, the early 1980s ushered in a period of disinflation, not inflation.
Bullard explains further:
“It is tumultuous times for monetary policy and that is why you’re hearing more from the Fed,” he said. “A tightening cycle is the hardest thing for a central bank to do. There is a lot of risk that you might fall behind the curve and wind up with a lot of inflation. On the other hand you hate to choke off a fledgling recovery. And so there is a lot of debate about it.”
He asserts there is a lot of risk of inflationary outcomes, but doesn’t explain why. Most importantly, I would like him to explain why we should expect significant risk of falling behind the curve in an environment where wages gains are minimal at best. Given that we need to get job growth up and unemployment down sufficiently to drive wage growth beyond what can be compensated by productivity, something of a lengthy process to say the least, it doesn’t seem likely the Fed will fall behind the curve anytime soon.
The interview concludes:
In the past, the Fed hasn’t explained itself well. “We’re trying to do a better job of communicating.”
I can’t resist: They need to try harder.