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Fed's Bullard: Not enough evidence of a slowdown to change policy

By Neil Irwin
A quote from James Bullard, president of the Federal Reserve Bank of St. Louis, in my story last week drew some comments -- and some pointed criticism -- in the blogosphere. Here are more extended excerpts from my interview with Bullard, which was conducted by phone on July 7.


James Bullard, president of the Federal Reserve Bank of St. Louis --Bloomberg Photo

Bullard has been president of the St. Louis Fed, and a member of the Fed's policymaking committee, since 2008. He comes from a monetarist school of economic thought but has been more inclined than some of his fellow monetarists to support aggressive intervention to support the economy over the past two years.

WashPost: How do you characterize some of this weak economic data we've seen, and is it anything that is causing you to adjust your forecast?

Bullard: We watch everything very carefully, so we're certainly well aware of recent developments. I would divide the data into two parts. The first part is the European sovereign debt situation. That I think could increase tail risk for the U.S. If the European sovereign debt crisis morphed into something much larger, then I think the U.S. would be at risk, but I see that as a low-probability event. I think the Europeans are so far doing a reasonable job in addressing the crisis. They are making progress in dealing with some of the sovereign debt issues. ... I see increased tail risk but not a lot of direct effects right now.

Then we have weaker data in the U.S. directly. Yes, it's weaker, but not weak enough to derail recovery at this point. We always expected the recovery to be choppy. I think this is a patch with a little bit weaker data than we expected. Most forecasts, certainly my forecasts, have the economy growing in the second half of the year and into 2011, and might even grow faster in 2011.

We're watching very attentively, but at this point these two pieces I'm talking about, the European situation and the weaker data in the U.S., those two would not be enough to change policy at this point.

Having said that, I've been one of the advocates on the [Federal Open Market] Committee of state-dependent policy. So if the economic situation changes, policy should react. You shouldn't sit on your hands. If we had to do more, I think the committee would be ready to do more and able to do more. I think there's plenty that the committee can do. It would probably take the form of buying additional Treasuries as part of quantitative easing program. I think there's plenty more we could do if we had to, but I don't think we're at that point based on my reading of the situation.

Given some of the weak data flow and higher tail risk, would you consider some more modest steps than a new quantitative easing program, like cutting the rate on interest on excess reserves or strengthening the extended period language?

We certainly could cut [interest on excess reserves] a little bit, though I'm doubtful that would have a very large impact at this point.

We already have extended period language, and trying to stretch that out into the future, I'm not sure how effective that really is at this point. But we could certainly talk about that and consider that. But I'm a little doubtful about how big the impact of that would be.

So what kind of state of the world would you need to see before you started to favor more quantitative easing? How bad would things have to be before you started banging the drum for more asset purchases?

I think the economy would have to weaken more than it has at this point. Most forecasters still have pretty reasonable growth for the second half of the year. Of course there's tremendous uncertainty around any forecast like that. You could get into the fall and all of a sudden the data is quite a bit weaker than you thought, and obviously at that point you have to make a decision. But that's not really what I'm expecting to happen. . . . Those are the risks we face, but we always face risks in the policymaking world. I just don't think at this point we really have enough to go on to change the policy course.

You've been talking for a year now about exit strategy and how you pull out. Should I think of the work going on now as kind of the reverse of exit strategy, thinking through what the options are if the situation does deteriorate?

Yeah, I think you should. It's always very important to be ready because the economy is so volatile, you have to be ready to react in both directions and have plans of how you would react in both directions.

It's true we've been talking about exit strategy for a whole year. The thing is, it was such an extraordinarily easy policy. Zero interest rates haven't been seen in the U.S. for decades. On top of that, there was a very extensive quantitative easing program. A super-easy policy like that is going to raise a lot of fears in markets that somehow the situation is out of control or the central bank is pursuing an unsustainable policy. The discussion of exit was a way to reassure markets that we have thought about this, have ways to withdraw stimulus as appropriate, as the economy improved. That's why so much of the stress was in that direction.

If the Fed had just taken on ultra-aggressive policies without talking about how they might be withdrawn, expectations could really get out of control, and that's why there was so much talk about exit, just to reassure people.

Now the data is a little softer, so there's probably a little less talk about exit.

It seems like we went straight from talking about asset sales to talking about asset purchases without stopping midway. Maybe there was one day there in the middle.

Yeah, that's kind of true. But it just shows you how volatile the economy can be. One day everything seems to be going fine, the next day there are new developments that are dismaying.

By Neil Irwin  |  July 16, 2010; 11:50 AM ET
Categories:  Federal Reserve  
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