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Economic Growth

FedWatch: James Bullard, President of the Federal Reserve Bank of St. Louis

This is the fourth in a series of profiles of the members of the Federal Reserve Board’s Open Market Committee [FOMC]. The profiles will focus on their writings, public statements, and voting records as members of the FOMC.

Since assuming office in April 2008, St. Louis Federal Reserve Bank President James Bullard has generally been considered of the more hawkish members of the FOMC. However, his speeches, interviews, and lone dissenting FOMC vote since 2013 show that he is quite moderate. If there is a central theme to Bullard’s views on monetary policy, it’s that he favors inflation targeting. But unlike many who view the Fed’s 2 percent target as a ceiling – that is, inflation is not supposed to surpass 2 percent – Bullard clearly views it as a legitimate target, such that 1 percent inflation is just as problematic as 3 percent inflation. This means that when Bullard anticipated less-than-two-percent inflation, he generally favored monetary stimulus; when he anticipated over-two-percent inflation, he favored tightening.

In 2010, Bullard warned that the U.S. might be on the verge of a Japan-like deflationary spiral, and came out in favor of quantitative easing as a remedy.[1,2] His support for quantitative easing was full-throated – Bullard stated that quantitative easing (QE) “offers the best tool to avoid such an outcome” (pg. 339).[1] The New York Times noted that only three out of ten FOMC members at the time had expressed such strong worries about deflation:

“Of 10 current members on the committee, two are openly concerned about inflationary risks; three, now including Mr. Bullard, are somewhat worried about deflation; and five centrists, including Mr. Bernanke, have not expressed a firm leaning either way.

“Mr. Bullard, in a conference call with reporters on Thursday, said that if any new ‘negative shocks’ roiled the economy, the Fed should alter its position that interest rates would remain exceptionally low for ‘an extended period,’ or resume buying long-term Treasury securities to stimulate the economy.”[2]

CEPR and Nicolas Buffie / May 10, 2016

Article Artículo

Yes, the Economy Is Rigged, Contrary to What Some Economists Try to Tell You

I see Greg Mankiw used his NYT column to tell folks that politicians are spinning tales when they say the economy is rigged. I would say that economists spin tales when they tell you it is not. (Mankiw and I just ran through this argument on a panel in Boston last week.) Let's quickly run through the main points.

First, the overall level of employment is a political decision. We would have many more people employed today if the deficit hawks had not seized control of fiscal policy back in 2011 and turned the dial toward austerity. The beneficiaries of higher employment are disproportionately those at the middle and bottom of the income distribution: people with less education and African Americans and Hispanics. So the politicians pushing austerity decided that millions of people at the middle and bottom would not have jobs.

Furthermore, in a weaker labor market, it is harder for those at the middle and bottom to get pay increases. So the shift to austerity also meant that tens of millions of workers would have to work for lower pay. Read all about it in my book with Jared Bernstein (free, and worth it).  

The second way in which it is rigged is our trade policy. First there is the size of the trade deficit. This is the result of policy choices. Instead of forcing our trading partners to respect Bill Gates copyrights and Pfizer's patents, we could have insisted they raise the value of their currency to move towards more balanced trade. But Bill Gates and Pfizer have more power in setting trade policy than ordinary workers.

Dean Baker / May 07, 2016

Article Artículo

Did Donald Trump Get the Story on Buying Back Debt at a Discount Right?

Trying to make sense of Donald Trump's comments can be a risky business, but it is actually possible that he got it right and the NYT's Neil Irwin got it wrong on dealing with the national debt. Irwin had a NYT Upshot piece in which he discussed Trump's comments on monetary policy. Trump essentially endorsed the low interest rate policy being pursued by Janet Yellen and indicated that he would seek to appoint a Fed chair who would continue to follow this policy. (FWIW, we have yet to hear anything from Secretary Clinton on what sort of people she might appoint to the Fed.)

Irwin goes through Trump's logic on low interest rates and agrees that it is essentially right. But then he turns to Trump's comments on buying back debt at a discount:

"But Mr. Trump also suggested something that would represent a radical shift in United States policy if we take him seriously. 'I’ve borrowed knowing that you can pay back with discounts,' he said. He added, 'Now we’re in a different situation with the country, but I would borrow knowing that if the economy crashed, you could make a deal.'"

If Trump is suggesting that we will get bondholders to take a haircut on debt because the government would otherwise go bankrupt (something Trump has repeatedly done with businesses he owns) then Irwin is right. This would be a radical departure and is frankly almost inconceivable (we could just print the money).

But there is a way this can make sense. If interest rates rise, the situation Trump described, the market value of long-term debt falls. For example, a 30-year bond issued in 2015 at an interest rate of less than 3.0 percent, might sell for less than 70 percent of its nominal value if the long-term interest rate crosses 6 or 7 percent, which it certainly could.

Dean Baker / May 06, 2016