St. Louis Fed's Bullard Discusses U.S. Monetary Policy and Fed Communications

LOUISVILLE, Ky. – Federal Reserve Bank of St. Louis President James Bullard discussed “The Fed on Pause” on Wednesday as part of a Dialogue with the Fed event sponsored by the Bank’s Louisville Branch.

Bullard said the Federal Open Market Committee (FOMC) is currently “on pause” because the existing stance of monetary policy is already ultra-easy and the U.S. economy has outperformed expectations since last fall.  He discussed some risks to the pause policy, noting that “the main risk lies in potentially overcommitting to the ultra-easy monetary policy, reigniting the global inflation debacle of the 1970s.” 

Bullard also discussed recent, and possibly additional, improvements to FOMC communications.  “It may be possible to improve FOMC communications further by producing a quarterly report similar to those produced by other central banks,” he said.  “This could potentially provide a more fulsome discussion of the outlook for the U.S. economy and for policy than is currently provided.” 

The Fed on Pause

Bullard described some of the actions the Fed has taken since 2008 to ease monetary policy aggressively and said that “these Fed actions remain impactful today.”  In particular, he noted that the policy rate remains near-zero, the large Fed balance sheet remains in place, “Operation Twist” is still ongoing and will alter the balance sheet composition for some time to come, and the calendar date guidance regarding the first increase in the policy rate remains in effect.  “Meanwhile, the U.S. macroeconomic data have been stronger than expected as of last autumn,” he said. 

“The ultra-easy monetary policy—much of which is still impacting the U.S. economy—along with better-than-expected data over the last nine months combine to put the FOMC on hold, or pause, in its aggressive easing campaign,” Bullard said.

Risks to the Pause Policy

Bullard then discussed some risks to the FOMC’s pause policy.  “The main risk is that the Committee will, as it has in the past, overcommit to the ultra-easy policy,” he said.  “The policy has been appropriate so far, but could reignite a 1970s-type experience globally if pursued too aggressively,” he said, noting that the 1970s era included four recessions in 13 years, double-digit inflation and double-digit unemployment.  “The lesson was clear,” Bullard said.  “Do not let the inflation genie out of the bottle.”

Regarding other potential risks, including concerns that the FOMC has done too little, Bullard said, “If anything, the Committee may be trying to do too much with monetary policy, risking monetary instability for the U.S. and the global economy.” 

He added that should the U.S. economy encounter further negative shocks, “the Committee can respond as appropriate to a significant deterioration relative to the current forecast.”  Regarding concern that the FOMC has allowed the price level to fall off the appropriate path, Bullard said the price level path seems appropriate when compared with a path that assumes an annual inflation rate of 2 percent (which is the Fed’s inflation target). 

In discussing the labor market situation, Bullard noted that “monetary policy is a blunt instrument which affects the decision making of everyone in the economy.”  Given that labor market policies (e.g., unemployment insurance, worker retraining) have direct effects on the unemployed, “It may be better to focus on labor market policies to directly address unemployment instead of taking further risks with monetary policy,” he said. 

Bullard noted that the near-zero rate policy has been in place for more than three years now, and it is projected to remain in place for several more.  “The near-zero rates cause other distortions in the economy, including punishing savers,” he said.

Fed Communications

“The FOMC has increased the degree of transparency surrounding monetary policy in a variety of ways since the 1990s,” Bullard said.  For example, in January 2012, the FOMC began releasing participants’ forecasts of the future path for the policy rate. 

Although the economy is described by many variables, Bullard noted that the Fed’s current communication strategy operates with only a few variables.  “The FOMC could instead publish a quarterly document akin to the Bank of England’s ‘Inflation Report,’” he said. 

“A report of this type could potentially lay down a benchmark ‘Fed view’ on the key issues facing the U.S. economy,” Bullard said, adding that “FOMC participants could point out where their views differ from the benchmark.”  Furthermore, he said, the release of the report could be coordinated with Chairman Bernanke’s quarterly press briefings.  Such a report could provide “a broader discussion of the U.S. outlook,” Bullard said.