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Bullard Wanders way off Fed Reservation and onto CNBC Set

Bullard Wanders way off Fed Reservation and onto CNBC Set

 

This is not your father’s Fed where transparency in policy had one meaning – film used for overhead projectors during seminars.

 

On Thursday the St Louis Fed President, known as an inflation hawk, warned of a Japan style deflation, lost decade and called for contingency plans for nipping this risk in the bud.  The remarks saw stocks sag and bonds rally (with a lag) and even had renowned Fed watcher and former Fed Governor Meyer tell the NY Times that Bullard’s remarks mark a significant shift at the Fed -  “This is very significant. He has been one of the most hawkish members, but he is now calling for the Fed to ease aggressively.”

 

Sorry but this is summer and news is well in short supply.  The NY Times ran Bullard on its early edition front page.  Even financial TV was caught up in the Bullard blizzard debating whether his remarks moved markets. 

 

Bullard is not one markets normally associate with leading thinking at the Fed.  Indeed I can’t remember when (in 25 years) the last time a District Fed President was key in shaping monetary policy – perhaps NY Fed President Corrigan was the last.  So time out please.  Bullard may have turned in his hawk union card for the dove card but who really cares unless the Board is on board.  And this is not especially clear right now, especially when it comes to his main point which is to drop the pledge to keep rates low for an extended period.  His point was that this was adding to deflationary expectations when the purpose is to boost inflationary expectations (multi-equilibria outcome).  He drew on (monetary) economic theory that argues when the zero bound (interest rate) is reached, having an interest rate-based monetary policy is pointless and contributes to a Japan-like outcome, depressing household and firm expectations about future prices and economic activity.  Mind you Bullard, a current voting member of the FOMC, has not dissented to end the low rate language pledge despite Hoenig’s dissent (albeit for a very different reason…Tom sees only inflation nails with his hammer).  Bullard said he does not dissent to adhere to the tradition of consensus and support for the Chairman.  So some traditions die hard.

 

Bullard’s case for the deflation risk being greater than inflation risk is clearly more prescient for markets than his point on policy theory.  Here the Fed is split…well sort of.  The reality is that a clear majority of the FOMC are now worried more about deflation than inflation.  If that were not the case than the FOMC statements and minutes would have already dropped the pledge to keep rates low and surely Bernanke would not have chosen to describe the current environment as unusually uncertain.  So Bullard’s point on the deflation risk is to have an explicit contingency plan in place to address the risk if there is an additional shock to the economy (like the EZ sovereign debt crisis, another banking crisis or a terrorist attack).  Bullard was saying the Fed does not have a plan B ready to go, just a general outline of options (which Bernanke has identified on several occasions recently – see H-H testimony in Congress earlier this month).  Bullard seems to have zeroed in on buying more US Treasuries (like the BOE which focused on buying Gilts, not ABS as the Fed did). 

 

I suspect the FOMC majority agrees on deflation is public enemy number one but disagrees on how to address it, in the event that the economy slows more and the risk rises…which appears to be happening since May. 

 

In a summer market starved of news, Bullard has moved from obscurity to prime time.  The question I have is whether Bullard’s PR plan is more an anomaly or a look at the future…open debates of Fed policy…post FOMC meeting press conferences…televised FOMC meetings?  In other words the Fed now has to deal with how much transparency is too much.  Bullard is clearly testing the waters.  And he has put himself on the map as a result.  But le’s not forget policy at the Fed is still largely shaped at the Board and remarks from Bullard are only significant in the context of what they tell us about the Board’s view (not unified for sure – Warsh seems to be opposed to more QE and sees inflation as public enemy number one) and what if any guidance the remarks prompt from the center. 

 

But the likes of the NY Times and Larry Meyer, in a summer market devoid of Fed news,  seem to have caught a long pass and run to the wrong end zone on this news story.

 

David Gilmore

 

 

 

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