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Bullard Discusses Federal Reserve Policy Strategy and the Economic Recovery

The Wall Street Journal "News Hub"
London
March 23, 2010

Participants:
James Bullard, president and CEO, Federal Reserve Bank of St. Louis
Kelly Evans, WSJ News Hub, morning host

Kelly Evans: The U.S. recovery is on track, but the Fed might want to reconsider its, quote, "extended language phrasing." Welcome to the "News Hub". I'm Kelly Evans, joined by St. Louis Fed President James Bullard. Thanks a lot for being here.

James Bullard: Thanks for having me.

Kelly Evans: Welcome to the "News Hub". Let's start first with the recovery. There's a lot of concern about whether the economy might double dip, lose momentum. But you say at this point things look like they're on track?

James Bullard: I think it's on track. I don't think a double dip is that likely. If you look statistically, it just doesn't happen that often. Barring some kind of big policy mistake or something like that, I just don't see a double dip as being very likely.

Kelly Evans: Is there a risk that we sort of leave housing behind in this? Housing is often one of those industries that's first to recover—you bring down interest rates, you get it going and it sort of helps lead people out.

James Bullard: Yeah.

Kelly Evans: But what do you think about the market?

James Bullard: Well, housing is down, obviously, at a very low level right now, and I think it's just going to stay at a low level, maybe improve slightly from this low level. I do not expect it to ramp back up to the levels that it was at before—too much damage was done to the housing sector to expect that. But you know, as long as it doesn't deteriorate further, it won't be detracting from GDP the way it was over the last couple of years. I think the stabilization is helping us.

Kelly Evans: Is that why you at the Fed feel confident at this point in stepping away from the mortgage market? And as the government allows its first-time homebuyer programs to wind down, do you think the market's ready to stand on its own?

James Bullard: It's true, we bought all these mortgage-backed securities; we're wrapping up those sales now. We hardly bought any recently because they're tapering down. I think we'll get a very smooth transition at the end of the program. What you do is you commit to buy, and then the actual purchase takes place later; so, it's actually some more that'll go on through April and May. But I think it'll be a fairly seamless transition, and I think that shows you that the big effect there is the stock effect, the size—we've already taken $1.25 trillion onto our balance sheet—and that's what important; it's not really the flow that's critically important.

Kelly Evans: I'm curious, too, with the recovery being on track, the next question, certainly, as you look at parts of Asia and emerging markets, is whether we start to get inflation sooner than anyone's expecting. And that's hugely critical at this point in the Federal Reserve's job.

James Bullard: Yeah.

Kelly Evans: What do you see happening with inflationary pressures right now? Are you concerned that we have a pricing... ?

James Bullard: I think inflation is pretty muted right now, and so the risk to us is over the medium term, two years out and three years out and like that. If we do not manage our balance sheet appropriately in the coming months and quarters, we may get into a lot of trouble later on. The issue for us is how to manage that, and it's an unprecedented policy. I think that's one thing you have to keep in mind: zero interest rates, plus a huge amount of quantitative easing; so, that's an unprecedented policy. You can't just look back over your regressions over the last 40 years and decide how that's going to affect the economy. There's a lot of judgment involved, and we have to be very careful, though.

Kelly Evans: When might the Fed next raise its discount rate, as it did last month?

James Bullard: On the discount rate, the idea was to get back toward a more normal spread between the discount rate and the federal funds rate, and we took one step in that direction. We could take more steps, but no decisions have been made at this point.

Kelly Evans: And this is what I was referring to in the beginning, this whole idea of keeping rates on hold for an extended period of time, as is included in the statement, every six weeks or so. Most people in the market see that and they go, "OK, that means they're not going to do anything for six months."

James Bullard: Yeah.

Kelly Evans: Is that the right interpretation of that language?

James Bullard: I don't think it really is. But I think it's come to be interpreted that way; that's why I'd like to think about if we could get to more state-dependent language, which would emphasize that it really depends on how the economy performs. I think that that's the truth of the situation with monetary policy. It's always the situation with monetary policy; you've got to look at inflation developments and developments in the real economy and financial stability in order to decide what to do next. You can't just say, "Well, six months from now or nine months from now, we're going to take some action," because you just don't know until you actually see all the data.

Kelly Evans: And I'm curious, too—to put this situation in context, a lot of people before the crash said the Federal Reserve was too hesitant, and it just sort of telegraphed what it was going to do with interest rates, and that was the wrong thing and it encouraged risk—taking in the markets. Is there a danger of that happening again this time around?

James Bullard: You're talking about the tightening in 2004.

Kelly Evans: Right.

James Bullard: Well, I've been through two tightenings since I've been in the Fed, 20 years in the Fed, and the 1994 tightening and the 2004 tightening—these are major ones—and the '94 was a disaster; it was one of the worst years for the bond market—so that one wasn't telegraphed enough. The 2004 one was pretty choreographed. You had quarter-point increases for 16 months in a row.

Kelly Evans: Right.

James Bullard: I don't think that was optimal either. Maybe this time we'll get the happy medium, and we'll get just the right way to do this.

Kelly Evans: Will the next tightening cycle have a "4" in it as well?

James Bullard: Yeah, well, I don't think so.

Kelly Evans: We want to thank you very much for being here and taking the time. St. Louis Fed President James Bullard. Here at the "News Hub", I'm Kelly Evans for The Wall Street Journal.

(End of Recording)