James Bullard, president of the Federal Reserve Bank of St. Louis, said monetary policy should be guided by the central bank’s price-stability goal even with historically high unemployment.
“The idea that the Fed should ‘put more weight’ on unemployment does not fare well,” Bullard said in a speech in New York. “Such an approach may be highly counterproductive.”
Bullard supported the Federal Open Market Committee decision in March to continue to buy $85 billion in bonds every month until the labor market outlook improves “substantially.” It also pledged to keep interest rates near zero as long as unemployment is above 6.5 percent and inflation doesn’t exceed 2.5 percent. The unemployment rate stood at 7.6 percent in March.
Bullard, in his presentation on the current economy, said the U.S. unemployment rate has been declining at about 0.7 percentage point per year since peaking after the last recession ended.
“At this pace, the unemployment rate will be in the low 7 percent range by the end of 2013,” he said to the Hyman Minsky Conference on the State of the U.S. and World Economies.
While that rate is “high by historical standards,” Bullard cited academic work by economists Federico Ravenna and Carl Walsh as suggesting the Fed should use its inflation goal, which is 2 percent, as the main guide to policy.
“Frontline research suggests that ‘price stability’ remains the policy advice even in the face of serious labor market inefficiencies,” Bullard said. “Attempts to address the various labor market inefficiencies solely with monetary policy do not work very well because improvements on one dimension are simultaneously detriments on other dimensions.”
“The essential finding is that monetary policy alone cannot effectively address multiple labor market inefficiencies, and so one must turn to more direct labor market policies to address those problems,” Bullard said.
Federal Reserve Vice Chairman Janet Yellen yesterday said she favors holding the benchmark interest rate “lower for longer,” while New York Fed President William C. Dudley said a slowdown in the pace of employment growth in March highlights the need to maintain the pace of bond purchases.
Bullard joined the St. Louis Fed’s research department in 1990 and became president of the regional bank in 2008. His district includes all of Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.