- REUTERS/Peter Newcomb
The Federal Reserve decided last week not to hike rates – but James Bullard, president and CEO of the Federal Reserve Bank of St. Louis, isn’t buying the argument.
He has railed against the Federal Reserve’s strategy, saying the central bank is playing bad baseball.
He’s the Federal Reserve’s last remaining true hawk, or someone intent on raising rates.
He will sit on the 2016 Federal Open Market Committee, where he’ll have a say in monetary policy. FOMC seats rotate between each of the regional Federal Reserve banks, and this year he’s an alternate on the committee.
Bullard visited Business Insider’s New York headquarters and sounded off on topics as varied as cybersecurity, global factors challenging the Fed, and House Republicans stepping up pressure on the central bank.
We’ve edited Bullard’s responses for clarity below.
The Fed should lift rates now
- FRED data
Business Insider: Why is now the time to raise rates?
Bullard: “It’s not complicated. If you look at the goals of monetary policy, they’re maximum employment and inflation. We’ve basically achieved everything that we can achieve with monetary policy. “The policy rate is near zero, where it’s been for close to seven years now. That’s not the normal rate. The committee thinks the normal rate is 350 basis points, so we’ve got a long, long way to go to get the policy rate up to something normal. “I think that the case is compelling, and I’m concerned that the debate has drifted toward even small moves being construed as tightening monetary policy. That isn’t the case.”
It is all about inflation
Business Insider: Which is more important for liftoff in rates: wage growth, unemployment, or inflation?
Bullard: “Of those three, by far the most important by far is inflation. Inflation is running low right now. A lot of that is because of oil prices. But low oil prices are ultimately a bullish factor for the US economy. For that reason you might want to try to look through the low prices of oil today and instead be looking to a measure like the Dallas Fed trimmed measure mean inflation rate, which is running at 1.6%. Certainly, you want everyone to get paid as much as possible, but wages are going to be a trailing factor. Another thing about wages, especially looking at nominal wages, there’s a productivity factor in there because … your wage could go up because productivity was higher, or because of inflation. Both of those factors have been low, and wage growth has been low in response to that. “On growth, growth forecasts for 2015 were upgraded at the last meeting from where they were previously. We previously had a picture of the first half of 2015 that was fairly weak, but now we have a picture of the first half of 2015 that was actually at trend or even a bit above trend, for growth. “I expect continued growth, above trend growth, in 2016 and 2017. That’s why I’m being a little more aggressive in saying we’re at an inflection point for the US economy. “Labor markets are now going to start to get very tight. Inflation’s going to return to target, and our policies are a long ways out of position compared to where we should be.”
Unemployment could drop to 4%
Business Insider: What will happen when rates increase?
Bullard: “I think as we increase interest rates, I would expect continued labor market improvement. The unemployment rate will head down into the 4% range, possibly into the very low 4% range over the forecast horizon. That’s already baked in the cake because the committee has already committed to a low path of interest for this stage of the business cycle. I think there will be continued improvement on those dimensions.
“On the dollar, if the US is the strongest economy in the world, you’re going to see a stronger dollar. That’s unpredictable, because other economies can surprise to the upside. Sometimes that will strengthen their currency and weaken the dollar. It’s unclear what the ramifications would be for the dollar.”
The makeup of the board of the Federal Reserve is just fine
- Thomson Reuters
Business Insider: Is there a greater need to appoint a hawk to the board of the Federal Reserve right now, given the departure of Richard Fisher and Charles Plosser?
Bullard: “It’s up to the president to make appointments to the board, and he can certainly decide who he wants. I’m sure they’ve got people on Capitol Hill that they’re trying to get through right now. I’m not sure where that process is. But we have plenty of good people on the FOMC.
“I don’t think there’s a problem; there’s many different views being represented. I’m trying to just trying to argue as forcefully as I can that this is the most prudent monetary policy right now.”
The equity rally is complete
- FRED data
Business Insider: How would a rate rise affect the equity market?
Bullard: “For equities, the process of coming out of the 2009 lows and rallying over the last six years to more normal levels, that process is complete.
“From here, it’s really a matter of equities trying to assess the future of the US economy, assess future value of the corporate sector. That’s what’ll drive equities going forward.
“From 2009 up until … a year ago, there was a tailwind behind equities because they had to come back up normal valuations after being substantially depressed during 2009.”
Those who want comment on monetary policy have to put their argument on the table
Business Insider: You’re taking on market commentators who are calling for 0% rates on a prolonged basis. But are the biggest investors – institutional investors – really paying them any mind?
Bullard: “Everyone that wants to comment on monetary policy has to put their argument on the table and has to be able to defend his arguments.
“I’ll push back against those that think there’s some kind of a big mistake being made by normalizing interest rates.
“I think prudent monetary policy would be to return our policy settings to normal from their very extreme and emergency levels that we’re seeing today.
“Again: The economy is practically right at the goals we set for the committee, but the policy settings haven’t budged 1 inch from where they were at the height of the crisis.”
Richard Fisher is right about getting monetary policy back to normal
- REUTERS/Brian Snyder
Business Insider: Richard Fisher has been an outspoken critic of some decisions at the Fed in the time since he has departed. What is he right about?
Bullard: “Richard Fisher is a great friend of mine. I appreciate his continued participation in the monetary-policy debate. He’s been one that has advocated getting back to normal. I think he’s right about that.
“A good thing about Richard, he had a lot of direct financial-market experience and formerly ran a hedge fund. He has a lot of sense about market outcomes, also, has a great network of contacts across the country and talks to leaders of a lot of different businesses.”
Happenings in China aren’t that important
Business Insider: What is the international factor that worries you most as it pertains to your job and the decisions you’ll make?
Bullard: “The US economy is not as exposed to emerging-market concerns as individual companies are. Individual companies will sometimes be driving 50%, 60% of their profits from somewhere overseas. Those guys have to be very concerned developments in the countries in which they operate, including China, aren’t going the way they planned.
“For the US as a whole we’re a big diversified economy. The percent of our economy that’s exposed to international concerns is probably only 10, 15%.
“You do put some weight on international factors. But not that large a weight.”
Cybersecurity is a big deal
Business Insider: Other Fed presidents have pointed out the importance of cybersecurity standards in stress tests. Where does that rank, on your list of priorities?
Bullard: “Within the Fed, I’m actually the head of the technology oversight committee. We do worry about cybersecurity all the time; the Fed is a target, and we try to be as good as we can be in thwarting efforts to attack our information or attack the Fed more generally. It’s certainly a very important issue – it is part of the regulatory process.”
The Fed should explain and defend its view in public
Business Insider: What do you say to people who criticize the transparency of the Fed?
Bullard: “I think there’s been higher pressure on the Fed in the last six or seven years since the crisis as the Fed became a huge focal point for action on the economy.
“I think we do the best we can to try to explain our views and defend our views in public. One thing I’m concerned about and continue to be concerned about is that the FOMC is considered a large committee and right now has 17 participants on the committee. But financial markets have 10,000 participants that are talking all day, every day, about what the Fed can do, should do, will do, would do. We’re badly outnumbered on that dimension.
“I’ve tried to be active talking about monetary policy, both my own views and monetary policy generally, to not allow all the discussion go to private-sector observers of the committee and instead talk to actual people that are making policy.”
The Fed is more transparent than people realize
- REUTERS/Yuri Gripas
Business Insider: Is there a middle ground that can be reached between the Fed’s critics on Capitol Hill, who want to pull the curtain back even further, and the central bank’s directives?
Bullard:“I think they’re right to press us on transparency issues, and I think everybody would like as much transparency as is feasible.
“There have been ideas about, how, maybe you could report to Congress more often, maybe you could provide certain types of information. By and large we have tried to do that through many channels.
“One thing we do, for instance, is post all of the securities that are held by the Fed, actually by CUSIP number … a lot of people don’t realize you could go onto the webpage and check it all out … a lot of people think there is less information than there really is.
“Sometimes when you release a lot of information, then people’s eyes glaze over, and they maybe don’t look at it as much as they think they would. I think it’s all available, and if it isn’t, we’re pretty happy to provide as much as we can in the future.”
Debate is a good thing
- REUTERS/Brian Snyder
Business Insider: How does your public position on some of these policies affect your personal interactions with your colleagues at the Fed?
Bullard:“The Fed is an extremely collegial group. Many of the people I’ve known for more than two decades.
“The Chicago tradition in economics is to vigorously argue right from the get-go. If you go to a seminar at the University of Chicago, and I’ve been there, you put up your title slide and people are already peppering you with questions. You can’t get off your title slide to get to the next question.
“That’s how you get to the best ideas, that’s how you uncover the weaknesses in arguments that are being made, and ultimately to the best policy. I don’t think sharp arguments are a reason for people to be mad at each other.”