Bullard Says Investors Doubt Fed to Hold Inflation to 2%
Federal Reserve Bank of St. Louis President James Bullard said measures of inflation expectations indicate bond holders have doubts the central bank will hold price increases within its 2 percent goal.
“Distant inflation expectations from the TIPS market seem to suggest that investors do not completely trust the Fed to deliver on its 2 percent inflation target,” Bullard said today in a speech in Memphis, Tennessee, referring to Treasury Inflation-Protected Securities.
Bullard’s comments echoed Dallas Fed President Richard Fisher’s concern about rising expectations following the Federal Open Market Committee’s decision last month to start an asset purchase program. Policy makers said they could change the size of the central bank’s monthly asset purchases to reduce any risks from the program, including higher inflation or a disruption to financial markets, according to minutes of the Sept. 12-13 meeting released today.
The five-year, five-year forward break-even rate, which projects the pace of price increases starting in 2017, rose to 2.88 percent on Sept. 14, the day after the FOMC announced a third round of quantitative easing. That was up half a percentage point from July 26. It dropped to 2.77 percent on Oct. 2.
Bullard said to reporters after the speech that he disagrees with a monetary policy approach that would link action to a certain level of unemployment such as that proposed by Chicago Fed President Charles Evans.
“Tying monetary policy explicitly to unemployment is a mistake,” he said. “Unemployment tends to be a fickle variable” and can be affected by changes in the structure of the labor market, not just demand, he said.
A qualitative description for a goal would be preferable to a numerical target level for unemployment, which would be a “line in the sand” for action, Bullard said.
“This threshold thing is going to put the committee in more of a box,” he said. “And I think it is going to be not a good outcome even from the point of view of the people who want to do it.”
Bullard, who doesn’t vote on monetary policy this year, said inflation “is sometimes seen as a way to partially default on existing nominal debts,” and said that approach would hurt savers, mostly older U.S. consumers, in his remarks to the Economic Club of Memphis.
“A partial default today through higher inflation would be paid for via higher inflation premiums in future borrowing,” he said. “This type of policy would likely impair U.S. credit markets for many years.”
In response to audience questions, Bullard said the current low level of inflation gives the committee “some room to maneuver” though “ it is not very much room and it is not like 2010” when there was a threat of falling prices.
Bullard, who was the first policy maker to voice support for asset purchases in 2010, opposed the FOMC decision to expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing. The Fed is seeking to spur economic growth and bring down an unemployment rate stuck above 8 percent for 43 months.
In addition to undertaking QE3, the Fed said economic conditions would likely warrant holding their target interest rate near zero through at least mid-2015, extending a previous date of late 2014. The Fed said low interest rates will remain appropriate for a “considerable time” after growth strengthens.
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.
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