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00:00We were among the first to say that the Fed should start tapering. And I'm wondering if that's because you are afraid of inflation hanging around and may need to raise rates sooner than the markets anticipate. Yeah I think we did Frazier as well in St. Lewis. So just to set the record straight on that one group's. So yeah I think the keyword is optionality for 2022. We want to or I would like to anyway taper now and and get it finished by the end of the first quarter. And then at that point I think we could assess what's happening in the economy with respect to inflation. By that time we'll have many more jobs reports. And you know it certainly looks like they'll all be strong to varying degrees. Unemployment will tick down with a 4 handle at that point. And then we'll be able to see in the first half of 2022 if inflation is moderating or not. And if it's moderating then we're we're in great shape. And if that's not moderating then we might have to be more aggressive. So I think that optionality has a lot of value right now. I think the purchases don't have much value right now. So it seems like the trade off is just right to me. Let's phase out the purchases and let's give ourselves some breathing room in 2022. Well as you look over the forecast horizon do you think that inflation sticks around. Yes I think right now I'm sitting here today I'd say two and a half percent or higher in 20 to a core P.C. inflation. So where are you. Right now we're at three and a half on core P.C. inflation. That's the committee's preferred smooth measure of inflation and the one that's enshrined in SGP the summary of economic projections. So it looks like we're going to have quite a bit of inflation this year that three and a half percent number of measures from one year ago is higher than it's been in 30 years and is enough to bring the average inflation rate. However you want to calculate it on that measure over any five year period either looking back or looking forward up to 2 percent. So then in 2022 the question is how. How fast is inflation going to moderate. If it moderates quickly then then we're fine. But if it if it doesn't moderate and I'm right and where two and a half percent or higher then the Fed might have to start to try to put downward pressure on inflation or keep it at the right level. Do you worry that interrupts the new framework the idea that you could have to raise rates because inflation is higher than you anticipated but you don't get the unemployment rate down as far as you would like to or at least in terms of the diverse and inclusive unemployment rates. Now we'd be hitting the new framework exactly. Beautiful monetary policy under what I'm describing because we would have at that point had inflation above the 2 percent target for some time and then inflation on a core P.C. basis would be averaged 2 percent or some kind of 5 year window either backward looking or centered and forward looking. And so you'd be you'd be hitting it on that dimension. And then I think on the jobs you know you've got to think about exactly where we are today but where we're going to be at the end of the taper. The key thing here is when is the taper going to end. And it certainly looks like you're going to have very strong jobs market at that point. I mean you can make the argument today that this is one of the tightest job markets we've seen in in recent decades because the unemployment to vacancies ratio has gone down below 1. So more than one job opening for every unemployed worker. If you want a broad measure of labor market performance you can look at the Kansas City said labor market conditions index that's moved up into positive territory and is headed towards very high numbers which we'll be again indicating one of the strongest job markets that we've seen in recent decades. So I think you know all of that corroborates what you're hearing on this show now. Everywhere across the economy about jobs which is that firms are having a really tough time hiring. They're offering wage increases or offering bonuses or offering retention signing bonuses retention bonuses. They have jobs fairs where no one shows up. So lots of things seem to be pointing to a very strong jobs market right now. And if you're gonna have six percent growth in the U.S. economy over the second half of this year and 4 percent growth next year that's just going to improve all that much more. So I think we'll be in great shape in the first half of 2022. But we have to have some optionality there in case inflation doesn't moderate. Well what are companies telling you about what they're having to pay and how long they think they're going to have to pay it both for input goods and for labor. Is this going to be something that at this point they're anticipating a bit of a cycle. Well one of my top concerns and I've heard it I'm listening to you guys as CEOs will come in and they'll say yeah my input costs are way up but we don't think this is a problem. We're going to pass it right on in and raise prices. And you know my labor costs are up but we're going to pass that on into prices. That sounds like a worry. Some dynamic to me and one that you know we certainly want real wages to go up. But for everyone what those to be as high as possible. But we don't want to get into a cycle where that just feeds through to the inflation crisis in the economy. Jim Bowler Tom Keene good morning to you. Thrilled to speak to you before. Chairman Powell Jim Bowler I want to go back five years to two big things of 2016. One of them was Marvin Goodfriend and the uproar over his paper at Jackson Hole. The late Marvin Goodfriend folks of Carnegie Mellon on zero interest in the negative rates. Well guess what. Jim Bullard good friend was right. Negative rates up up up up worldwide as well. And also you may recall in 2016 somebody in St. Louis said forget about a single point outcome. We are going to have the different states of a regime change dovetail what happened five years ago and take us out 10 years. Can we get to a constructive different state. Given the huge negative interest rates worldwide. Yeah that after professor good friends pay for central banks around the world did experiment with negative rates. I think with very mixed success and I think that's why we tried to avoid that outcome in the US with respect to the regime. I mean I did switch in 2016 to saying that I thought we were just in a low inflation low nominal interest rate low real interest rate environment slow growth. And that wasn't going to change very readily. And that means that monetary policy didn't have to be as aggressive as we had previously banned. So I was going around the Davis side at that point but now we're coming through this pandemic and policy wise has been a human tragedy of course of unimaginable dimensions. But from the economist point of view played it very well as a nation with fiscal policy and the monetary policy. And now we're coming out of the pandemic with a very strong economy. And I think it's very possible that we're switching into a high productivity growth regime and that means somewhat higher interest rates than you'd otherwise have seen. It means faster growth than you otherwise would have seen. And I'm hopeful that all of that occurs. The last time we had a faster growth higher productivity growth economy was the late 1990s where we go going for four years and started talking about paying off the entire national debt. Well Jim you're talking about taking a nap. Yeah that didn't happen. Now Jim you're talking about negative interest rates and how that's been problematic in certain ways. And certainly in the United States it wouldn't be as smooth as it has been in other places for their money market fund. A variety of other reasons. But you've talked about the need to get interest rates up so that we can use that in combat the next downturn have some ammunition. If we cannot get rates substantially higher how important how do you foresee asset purchases factoring into future stimulus. Yeah they've become a standard part of the tool kit and we used it after the global financial crisis pioneered by former Chairman Bernanke. And kudos to him for that. And then you know when this crisis came along we went right back to it with considerable success. I would say in the March April 2020 period where we really were staring at a possible depression and a possible financial crisis. And I thought Chair Powell did an excellent job during that timeframe in getting us into a policy that avoided the financial crisis that could have occurred on top of the pandemic and put us on a very good footing. It wasn't too long after March April that financial stress measures came way down from from very high levels. And we got back to normality at least with respect to financial markets. Our asset purchases are part of the tool kit and they're here to stay. But right now I don't think they're helping us that much. And they may be causing harm especially in housing where we don't want to feed into an incipient housing bubble. We got into a lot of trouble in the mid 2000s with housing and I'm not too anxious to try to to see that happen again. So I think that just that time has come to to end these purchases and get the committee and the nation some optionality for what we may have to do in 2022. But we're not we're certainly going to keep sharp control over our our interest rate decisions. We're not going to be on any kind of mechanical path but we're going to want to assess where we are in the spring of 2022 to see what what course we want to chart to keep inflation under control from that point forward. Jim let me ask you one last question and that's about how you think the Wall Street folks are going to react to this. There's been a feeling that your guys are propping up the big gains that we've seen in the indexes. And the fact that the bond market has kept rates so low indicates they believe that we're not going to have an inflation problem. If you send a message that maybe we will and it's time to stop giving you guys support. We're going to have a problem. I don't think so. I mean you you talked to pretty much everybody in the markets. My sense is that you know at some level the tapering process has already been priced in. Maybe not that all the details around it or exactly exactly how it was sold. And so there's a little bit more there but certainly seems like commentators and traders are well aware that there will be a tapering process and that it makes sense at this point given how well the economy has done. This economy is producing more national income than the one that existed before the pandemic. The pre pandemic economy didn't have zero interest rates by the way. So I think I think markets would react in some broad sense. They'd react well to this because it would mean that the Fed is going to stay in good position to handle all the possibilities that might come if inflation moderates in 2020 to a great position for that. And if we get the taper out or what a then we'll also be in a position in 20 to go if we have to tamp down a little bit on inflation pressure and the economy.

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Fed's Bullard on Tapering, Inflation, Markets

Federal Reserve Bank of St. Louis President James Bullard discusses the factors behind his call for the Fed to taper asset purchases, the central bank's progress on meeting its inflation and labor market goals, and the financial market's reaction to a shift in policy on "Bloomberg The Open." (Source: Bloomberg)

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