markets and that’s, you know, part of what’s driving us up.
HAYS: I’m sure you hear it, you see it in the paper, maybe someone says. This isn’t a recovery. Like the people who are here in Jackson Hall, about a dozen who have come from various parts of the country, who’ve been unemployed for a long time or have – what (INAUDIBLE) work and have gotten jobs that have the salaries. One young woman I talk to with a master’s degree. So, they are frustrated. They say the Fed doesn’t get it. This isn’t a recovery. And I think this wages in this weakness in a labor market. People working part time, because they can’t find full time, is the reason why. What – what – how does the labor market look to you? Quite apart from – what it means for Fed policy? Has the world changed?
BULLARD: OK. Let me be clear. Let me be clear. I’m talking about after (INAUDIBLE) monetary policy. The very best that you can do. So what I’m suggesting is what I think would be the very best that you can do. And, you know, you look at 2004 to 2006. The Fed stayed too low for too long. I suppose we all slapped each other on the back about that. But boy, what a disaster. Total disaster. You allowed the housing prices to get out of hand. We told ourselves stories that – nothing bad was going to happen. They dropped by 30 percent. It was a global disaster.
So, you know if we are fomenting (ph) something like that again, that’s not (INAUDIBLE). That’s not going to be good for anybody. It’s not going to be good for, you know, any of the categories you just mentioned. So, you know, I think it’s important to keep in mind that there’s, you know, there’s more to really good monetary policy than just saying, you know, you have to keep interest rates low at every single juncture.
HAYS: So, are you saying, though, Jim, that that is the risk we – the Fed runs that we all run if the Fed moves too slowly and gets behind the curve?
BULLARD: I think there’s a dual risk. One would be inflation, but the other would be financial stability, and it’s substantial.
HAYS: Let’s take a look about the bond market, because if you just took yields at face value, you know, you’ve had the ten-year note down around, 2.5, then 2.4. Even below 2.4 percent on the U.S. tenure Treasury note. They don’t look to be worried about inflation at this point. Are they wrong?
BULLARD: They don’t, but I think the source of the global bond rally is that there’s a specter (ph) of the ECB coming in with a major QE program. I don’t’ have a sense of – if they’ll do that or whether they’ll do that, but that’s what the market is thinking, partly because European inflation is coming at such a low level, only about 40 bases points on their latest reading, well below their inflation target. So, even – even though the ECB is just – has a single goal of price stability, it was a way below their goal, so.
It’s a good question what their next move is going to be, but you can see that European yields have dropped dramatically, that German yield is under one percent. And that’s dragged down global yields. So, I think that’s a lot of what’s been going on here. I would also say that on inflation in the U.S., I think there’s a global factor in inflation. So, you know, part of what happens to our inflation rate is what else is going on around the world, and that those, you know, there’s correlation across countries and inflation rates is pretty substantial. So, if the rest of the world is seeing downdraft in their inflation rate, than we will too. And so I think we are getting some of that effect. So, I actually think that this year, the fact that inflation has come up, even when global inflation has been following a bit is, is a sign that inflation is coming back to target in the U.S.
HAYS: Well, more – it seems – more and more numbers, you know, the economic numbers on your part are not getting better. They seem to be getting worse. More bad numbers out of Germany. And one of the guests on my show recently, and how could the Fed move now? How could the Fed signal? Even signal a move to raise the rate at a time when you’ve got the Ukraine-Russia conflict and the sanctions, and Europe getting weaker. This wouldn’t be prudent. Of course, the Fed wouldn’t make a move at a time like this.
BULLARD: Well, I don’t know what your guest was thinking, but let me just paint the picture the opposite way. U.S. is growing at three percent, unemployment has dropped a point over the last year. Job growth is a real bust, and they are a long away from normal. They should get going on normalization, and then for Europe, you know, they might look to additional stimulus, although, you know, and I have advocated QE for Europe, and then it seems like you get the exchange rate movements in the direct – at least, pressure will go in the direction that you want, given that situation, a slowing Europe and a growing U.S.
HAYS: So, what about Japan? I just want to ask that because – I know you for years, that’s an area you studied, you studied their monetary policy, Obanomics is underway. Is it working? Is Japan on the right track?
BULLARD: Well, we are going to hear from the Bank of Japan here. AT this conference I’m anxious to hear what Governor Corrodo (ph) has to say, and, you know, it’s been a bold experiment and they just went through key piece of it and want to erase the consumption tax here in the spring. So, I think the jury is still out even after everything has happened. They have managed to move inflation expectations higher after decades of not being able to do that, and that’s impressive. So, maybe they will – break out of it, but I don’t think they are out of the woods yet.
HAYS: It is – are you past a point, is the Fed past the point of having any concern about emerging markets at the time the move is signaled by the Fed?
BULLARD: Well, of course, that’s always a concern and the last year’s Jackson Hall conference was practically the whole conference as far as I could tell was – was about emerging markets and the effect of U.S. policy on emerging markets. So, I have talked about that in speeches. I do think that you can sketch a theory that would have – that would support the views of emerging markets. I tried to do that in a couple of speeches, but still I’m – I come to the conclusion that really, the U.S. has to run monetary policy for the U.S. and the foreign economies have to run their monetary policy for their economies, and there’s no real better answer to that right now than – than that. I have worried that because we are doing so many unconventional things in the U.S., that it’s hard for those outside the U.S. to read the signals about the U.S. monetary policy, and that has maybe complicated the global equilibrium more than we used to pre-crisis. So, I think that’s – it’s a long rambling answer …
(LAUGHTER)
BULLARD: But that’s a – but I have thought about this issue partly in response to last year’s checks and home meeting.
HAYS: Exit strategy, the last minutes noted that the Fed’s – he’s talking about this. What – at this stage, it’s probably not too early, because if you are right, and the interest rate gets raised in March, and the taper is done, people are going to be wondering more and more about the quote/unquote exit strategy, and particularly in the bond market, because it could potentially has a big impact on them. What are some of your early thoughts? Do you know, have any definite idea or even hypothesis about what’s going to be important? Then what you would suggest as a bunch of tools or paths?
BULLARD: The committee has – has been thinking about this issue, and has been making preparations, the stuff has been thinking about this issue, relief for a couple of years, but – but we’ve intensified that effort recently as we get closer here, to the time when we might actually raise rates. So, I think we’ve got a good set of tools that we can use. We have interest rate on access reserves. We have a federal fund’s market, which is a mere shadow of its former self, but I think – I think we can maintain some of the focus on the federal funds rate on the grounds that that’s the usual rate that we’ve used to communicate to people. And then we’ve got this reverse – overnight reverse REPO facility, which I think all set a floor under the Federal Fund’s rates.
So, if we can move those three rates in tandem, then I think it will be pretty clear signaling to markets as to where the Fed stands and where short term interest rate stands. So, I think we are in pretty good shape. There are risks we don’t – we’ve never done this before, so we don’t know exactly how to work, but I do think they are wearing pretty good shape. I think we will maintain a focus on the Federal Fund’s rate, even though that market is not really very robust at this point.
HAYS: Depending on how you read the minutes that were just released, you might see a reluctance to use the reverse REPO facility. The minutes used the phrase, quote, “temporary use on limited scale. How are you going to target the Fed Fund’s rate successfully without robust use of the reverse RP facility?
BULLARD: Well, I think with a limited program, you still set a pretty solid floor under the Federal Fund’s rate. And we are talking about range, at least in my mind, between AOER and the overnight reverse REPO rates of 25 bases points. So, I don’t think it would have to be you know, that large of a program, possibly several hundred billion would be enough to set a good floor there, and then that fund should trade in between those two rates. So, that’s what I’m expecting, at least as of right now. If we wanted to, you know, if that didn’t work, the committee could revisit that and increase the size of program if we thought that was necessary.
But I think there’s a sense from, you know, on the committee and maybe myself as well, that, you know, we kind of want to keep the optional open, at least get back to normal someday, where you’d be back to a lower reserve environment, you’d be able to target the Federal Fund’s rate as we have done historically and successfully. And that that would be the way we would operate. But we can’t operate that way in this very high reserves environment, so that’s why we’ve got these other tools.
HAYS: Well, there’s a lot of things that have changed, it seems, it’s been an extraordinary five or six years, hasn’t it?
Can monetary policy, can the Fed kind of ever go back to where it was now? I mean is this – we are in non-treaded waters, you’ve done things you’ve never done. You are going to do more. Is it going to be, you know, a world that, you know, you don’t go back, you don’t’ just say, OK, now we just target the funds rate, thank you very much. But there’s new tools. And in fact, some would say, a very activist Fed, a Fed that controls a lot more than it used to. Can the Fed back away from that now?
BULLARD: Well, I think it’s – it is the time of change for central banking around the world and I think it’s unpredictable at this point, whether we’ll be able to, you know, go completely back to normal defined as, say, the 1990s, or the 2000s. You know, there may be permanent changes in central banking.
However, I would just stress that the only thing that Central Bank can do in the medium term in the long run is control the price level. So in that sense, I think, you know, the fundamentals haven’t changed, but how we go about that and conceptions of what – (INAUDIBLE) monetary policy look like – looks like might be changing.
HAYS: OK. I guess my final question, because I’m thinking of baseball, and I’m thinking of the Cardinals.
(LAUGHTER)
HAYS: To get back to where we started. If this were a baseball game? OK? What inning is the Fed in when it comes to monetary policy?
BULLARD: Well, it’s not a baseball game, because you’ve got – you’ve got incoming data and you’ve got to react to the incoming data, so it’s, you know, baseball game is delineated by the outs that have to be made in order to define the end of the game, and so I think it’s not really right think in those terms.
HAYS: So, but let me ask you, so – but you – I get the impression of – you’re pretty convinced of your forecast. If the data disappoint, are you going to back off from that March forecast?
BULLARD: Well, I have a history of shifting views and response to the data and so, I think it wouldn’t be a good day, if we got weak data and we had to do that, but – but I have changed in the past, and, you know, it‘d be – keep an open mind on that.
So, a lot of what I’m saying is just that, you know, tracking forecast of GDP are over three percent for the second half, we’ve got all this improvement, 200,000 jobs a months. The tracking says that they’ll continue through the whole year here. Unemployment will probably be down with the five (ph) handle not to – not too distant future. Do we really need to be at rock bottom on policy in that kind of environment. I don’t know.
HAYS: I think we are saying this – no, we don’t.
(LAUGHTER)
BULLARD: But it’s possible, of course, it’s always possible that data comes in completely different way and, you know, there’s ( INAUDIBLE) and they just sent back, right? Oh something, but that doesn’t work. People are expecting right now.
