St. Louis Fed's Bullard Discusses Four Questions for Current Monetary Policy

September 20, 2013

NEW YORK – Federal Reserve Bank of St. Louis President James Bullard discussed “Four Questions for Current Monetary Policy,” at the New York Association for Business Economics (NYABE) luncheon on Friday.

At its June 2013 meeting, the Federal Open Market Committee (FOMC) leaned toward an earlier-than-expected reduction in the pace of asset purchases, Bullard noted.  At its meeting earlier this week, the FOMC delayed tapering.  In his presentation, Bullard addressed four aspects related to current policy and concluded the following:

  1. Financial market reaction to the June and September FOMC meetings provides sharp evidence that changes in the expected pace of asset purchases have conventional monetary policy effects.
  2. The September FOMC decision illustrates that tapering decisions are data dependent.
  3. Continued cumulative labor market gains relative to September 2012—when the current asset purchase program began—would increase the probability of tapering.
  4. Relatively low inflation readings allow the Committee to be patient in assessing the future of asset purchases.

Is quantitative easing an effective way to conduct monetary stabilization policy?

In discussing the effectiveness of quantitative easing (QE), Bullard examined the financial market effects following the two most recent FOMC meetings.  He noted that the policy decision in June was more hawkish than markets had expected, whereas the policy decision earlier this week was more dovish than expected.  “The empirical evidence from these two episodes provides striking confirmation that changes in the expected pace of purchases act just like conventional monetary policy,” Bullard said.

In normal times, the FOMC would adjust the expected path of the policy rate upward or downward depending on macroeconomic circumstances.  Bullard explained that an easier-than-expected policy path would lower real interest rates, raise inflation expectations, increase equity prices and depreciate the dollar; a tighter-than-expected policy path would have the opposite effects. 

“Changes in the expected pace of purchases at the June and September FOMC meetings had the same financial market effects as would have occurred had the Committee been able to change the policy rate path directly,” Bullard said.  “Using the pace of purchases as the policy instrument is just as effective as normal monetary policy actions would be in normal times,” he concluded.  “In other words, QE is an effective way to conduct monetary stabilization policy.”

Are FOMC decisions about QE tapering data dependent?

As Fed Chairman Ben Bernanke has emphasized, decisions on the pace of tapering depend on incoming macroeconomic data.  “This was illustrated by the recent FOMC decision to delay tapering,” Bullard said, adding that at the most recent meeting, the FOMC downgraded its assessment of forecast real GDP growth for 2013 and 2014 and also reduced its expectations for inflation.  “Normally, the Committee would not want to reduce policy accommodation in this situation,” he said.

Bullard noted that the FOMC’s downgraded outlook relative to the June meeting reflected weaker-than-expected data during the intermeeting period and added that the June narrative—that the second half of 2013 would have strong growth—was called into question.

Does cumulative progress in labor market outcomes since September 2012 matter for QE tapering?

The FOMC’s stated goal when it began the current QE program in September 2012 was substantial improvement in labor market outcomes.  Bullard noted that two key labor market indicators—unemployment and nonfarm payrolls—have shown clear improvement over the past year.  For instance, nonfarm payroll employment grew by an average of about 184,000 jobs per month from September 2012 to August 2013, up from an average of about 141,000 jobs per month from March 2012 to August 2012.

“To the extent that these two important labor market indicators continue to show improvement, the likelihood of tapering policy action will continue to rise,” Bullard said. 

Do current low inflation readings suggest the FOMC can be patient in assessing the QE program?

While labor market outcomes have improved since September 2012, Bullard noted that inflation readings have been low, which suggests that the FOMC can be patient in assessing the QE program. 

“The main macroeconomic surprise in the U.S. since September 2012 has been a lower rate of inflation,” Bullard said.  He added that near-term inflation expectations measured from the TIPS market suggested little inflation pressure before the recent FOMC meeting. 

“While I expect inflation to rise during the coming quarters, I want to see evidence of such an increase before endorsing less accommodative policy action by the FOMC,” Bullard said.

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