Unconventional: A Policymaker's Reflections on Crisis to Recovery
"The financial crisis ultimately changed the nature of how we think about central banking and how a central bank should conduct monetary policy at the zero lower bound."
—James Bullard, President and CEO
James Bullard shared some reflections on his first 10 years as Bank president during recent conversations with staff. The following are excerpts from those discussions.
During the past 10 years, we have learned some important lessons in managing through the financial crisis and ensuing recovery.
This period underscored the importance of maintaining diverse views on the FOMC and highlighted the important role the Reserve bank presidents play at the table. My colleagues (past and present) and I have collectively provided continuity for the Fed—by striving to bring issues to the forefront, influencing the debate at the FOMC, and helping to shape monetary policy for the better.
Another reflection from this period is how challenging it has been to encounter the zero lower bound for the Fed’s policy rate. Earlier in my career, I would not have described it as a very serious problem, but it has turned out to be a more difficult issue than many of us appreciated. I thought this issue was something for the 1930s (during the Great Depression era), but the financial crisis ultimately changed the nature of how we think about central banking and how a central bank should conduct monetary policy at the zero lower bound.
Moreover, we have experienced ultralow policy rates globally for much longer than anyone anticipated. Previously, it would have been surprising to stay at the zero lower bound for more than two quarters, much less a year. Yet, we remained at a near-zero policy rate in the U.S. for seven years—with Japan and Europe even seeing negative interest rates. The idea that this would last for so long—way beyond ordinary business cycle time—has been a real shock to the global macroeconomics and central banking community.
Beyond the policy rate, the 2007-09 crisis made people reconsider the intersection between the financial sector and real economy. We have learned to be more understanding of the fact that financial crises can happen and that the modern economy is not protected against these shocks. While such crises are infrequent, they can be devastating to the economy as a whole when they do occur.
To that end, in my view, there is not enough discussion today about where the next financial crisis may originate. It has the potential to come from outside the banking sector, not inside it. The 2007-09 crisis arguably originated outside traditional banking—more specifically, from the nonbank financial (investment banking) sector.
As a central bank, we have an opportunity to reorient our thinking about these risks to ensure we set the right policy and employ the right level of oversight to help mitigate or prevent the potential impacts of future crises. We cannot wait for the next crisis to unfold to act.