Bullard Is `Bellwether' as Fed Weighs Duration of Asset Buying
James Bullard was the first Federal Reserve official to call for another round of asset purchases to boost the U.S. economy. He now may be the man to watch as policy makers consider how long to keep the stimulus.
The St. Louis Fed Bank president “is a bellwether person, an indicator of where the full committee is headed,” said Mark Gertler, a New York University professor who has co-written research with Fed Chairman Ben S. Bernanke.
Bullard, a 49-year-old career central banker, calls himself the “north pole of inflation hawks.” That’s precisely why he commands respect among colleagues on the Federal Open Market Committee who are skeptical about the need to buy $600 billion of Treasuries and concerned the policy may stoke inflation, said former Fed governor Lyle Gramley.
“His influence on the FOMC is, I would imagine, substantial, particularly because he was known as a monetarist and an inflation hawk when he joined the Fed and now he appears to have joined forces at least temporarily with those in the dovish camp,” said Gramley, a senior adviser at Potomac Research Group in Washington.
With unemployment at 9 percent and inflation at less than 1 percent, the Fed needs whatever policy leeway necessary for avoiding a deflationary trap, Bullard said in an interview. That should include the flexibility to pursue so-called quantitative easing indefinitely, he said.
“For right now, you have this disinflation trend in the U.S. and you have some threat of getting into a Japanese-style malaise,” Bullard said. “The first order of business is to avoid that.”
For most of his career, Bullard has been more concerned about rising prices. Fighting inflation is “part of my DNA,” he said in an interview at the regional bank over a breakfast of scrambled eggs with Tabasco sauce. “This is the most hawkish of banks.”
Bullard grew intrigued with economics while studying economic history at St. Cloud State University in St. Cloud, Minnesota, where he graduated in 1984. He was struck by the high-stakes monetary policy of Paul Volcker, who as Fed chairman halted inflation exceeding 14 percent by raising the main interest rate in 1980 to 20 percent, he said. Volcker kept money tight even as unemployment rose in 1982 to as high as 10.8 percent.
The failure of policy makers to avert the 1970s surge in prices fascinated Bullard, he said, and he decided to make economics his profession.
Macroeconomics a ‘Shambles’
“People told me macroeconomics was a shambles, don’t go into it,” he said. “But to me that sounded like opportunity.”
Bullard earned a PhD in economics from Indiana University in 1990 and joined the research department of the St. Louis Fed, closely tracking inflation and warning of its hazards. In a 1991 article, he praised the FOMC for restraining growth in the money supply, a policy he predicted the prior year would result in “very low inflation rates” compared with other countries.
In 1998, Bullard said in a paper that the Fed would be wrong to try promoting financial stability by letting inflation accelerate. In another paper later that year, he said falling prices aren’t necessarily harmful.
“The real economy can flourish against a backdrop of declining prices,” he said.
Bullard’s view changed during Japan’s “lost decade” in the 1990s, when low interest rates failed to spur growth. In 2007, he warned in a lecture that “the Japanese data are alarming” and low rates could lead to “the possibility of deflationary spirals.”
Bullard sees similarities between Japan and the U.S., with both nations having endured a “tremendous” drop in property values and then a banking crisis, he said.
When the Fed cut rates to near zero in December 2008, Bullard said he feared the U.S. didn’t understand the potential high cost of sliding into a liquidity trap, where an expanded money supply and record monetary stimulus fail to spur growth.
“I don’t think the profession really came to grips with it,” he said. Referring to economists, he said, “I don’t think we are armed with enough firepower on this.”
Bullard tried to add to his profession’s arsenal by publishing a paper in July entitled “Seven Faces of the Peril,” which called on the Fed to buy Treasury notes as a way to prevent deflation.
“The U.S. is closer to a Japanese-style outcome today than at any time in recent history,” he said.
Pace of Recovery
Policy makers took Bullard’s advice on Nov. 3, voting to buy $600 billion in Treasuries through June. They affirmed the plan in January, saying that the pace of recovery is “insufficient to bring about a significant improvement in labor market conditions.”
The stimulus has improved the economic outlook, and the debate at FOMC meetings on March 15 and April 26-27 may turn to whether to reduce the size of the purchases, Bullard said today in a speech.
The central bank could decide to buy $100 billion less in Treasury securities or taper off purchases through the third quarter, he said to reporters after the speech in Bowling Green, Kentucky, when asked about options he was considering.
Policy makers may want to gradually end the purchases rather than have “the Fed in the market on Friday and out of the market on Monday,” he said.
Bullard plays down concerns among some of his colleagues, including Kansas City Fed President Thomas Hoenig, that the expansion of the Fed’s balance sheet to a record $2.51 trillion may trigger a hard-to-control surge in prices. While future inflation is a “legitimate concern,” the central bank should focus on preventing inflation from slowing and leading to a broad decline in prices, Bullard said.
The inflation gauge watched by the Fed, which excludes food and energy costs, increased 0.7 percent in the 12 months through December, the smallest advance since records began in 1959. Central bank officials prefer inflation ranging from 1.6 percent to 2 percent.
“The Bullard view is what I call the ABD policy: Anything But Deflation,” said Stephen Wood, the New York-based chief market strategist for Russell Investments, which manages $149 billion. “They are taking out a $600 billion insurance policy against a Japanese spiral.”
In an interview last month, Bullard said the central bank should press on with Treasury purchases even amid signs the outlook for U.S. growth has improved.
“It’s too early to make a judgment on” whether to curtail asset purchases, he said. The FOMC at each meeting should reassess the benefits and risks from of the policy, known as QE2 for the second round of quantitative easing, he said.
“You could pause on QE, you could stretch it out” over time while maintaining the same purchase target, he said.
Bullard has staked out bold positions before. In November 2009, he said history suggested the Fed wouldn’t raise its target federal funds rate until 2012, two years later than expected by private economists. The consensus has caught up with him, with the median of 54 economists surveyed by Bloomberg News this month expecting an increase in the first quarter of 2012.
While Bullard lost his FOMC vote last month in an annual rotation among Fed presidents, he’ll retain a leading role shaping policy through speeches, published research and his comments to colleagues during FOMC meetings, Gertler said.
“Bullard is driving the financial and monetary-policy debate at the Fed right now,” Wood said.
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