Bullard channels Lars Svensson
So I go to a monetary conference in Italy for a few days and everything falls apart. Actually that’s an exaggeration–if we think in terms of levels, the stock market is still doing fine.
In any case there’s an extraordinary amount of news, and I haven’t been able to keep up. These are initial reactions:
1. I have no idea why real T-bond yields are soaring—no idea at all. However given the rise in real bond yields, the stock market setback is quite small, indicating that the market doesn’t expect significantly slower growth. That also confuses me.
2. I’ve been heavily criticized for claiming “monetary offset,” as Bernanke himself says the Fed can’t offset the negative effects of fiscal austerity. Make that Bernanke used to say that; now he talks like a market monetarist:
Bernanke said the quantitative-easing program could end in the middle of next year. The chairman was upbeat about the outlook, saying housing was strong and the recovery seemed to be brushing aside any headwinds from fiscal policy.
3. I’ve had issues with James Bullard in the past, as he seems to focus too much on short term movements in inflation, which are often transitory. But given the current low level of inflation, and low 5 year TIPS spreads, I can’t disagree with this:
In a statement elaborating his dissent from the Fed policy decision issued Wednesday, Bullard noted that the central bank announced that less-accommodative policy was in store at the same time that it marked down its forecasts for 2013 growth and inflation.
. . .
Bullard, who is most often classified as a hawkish member of the Fed’s leadership team, dissented for dovish reasons: He thinks the Fed might have to ease more to get inflation higher.
Remove the word “more” and he’s exactly right.
In a separate interview with the Washington Post, Bullard said the Fed was more hawkish today than it was one week ago.
He attributed the volatility in financial markets not to Fed communication, but to perceptions of upcoming “tighter policy.” “You can communicate it one way or another way, but the markets are saying that they’re pulling up the probability we’re going to withdraw from the QE program sooner than they expected, and that’s having a big influence,” Bullard said.
The Fed would like inflation to average 2% over time. But the central bank’s favorite inflation target has fallen to 0.7% over the past 12 months.
Prior to this week’s Fed meeting, Bullard had raised a red flag about the inflation data, saying he thought the Fed might stand pat until it better understood the factors behind the trend. He stressed the issue in his dissent, saying the Fed “should have more strongly signaled its willingness to defend its inflation target of 2% in light of recent low inflation readings.”
The Fed “must defend its inflation target when inflation is below target as well as when it is above target,” the Friday statement said.
In more general terms, Bullard said he was concerned the Fed is making decisions based on calendar dates and not incoming economic data.
Bullard is saying that at the current policy setting we are likely to undershoot on inflation, and hence we should ease. But Bernanke just tightened policy. Bullard is just as frustrated as Svensson used to be at the Riksbank, and for exactly the same reason.
4. And then I find out that Obama just fired Bernanke.
5. And the Greeks are still causing market turmoil.
So year after year the markets, and market monetarists, are right, and the Fed is wrong. How long before the Fed figures out that money’s been too tight since 2008?
PS. I haven’t had a chance to look at the old comments, but will do so tonight and tomorrow. I’ll be increasingly busy over the next year, and will have to cut back in some areas. If you email me, don’t recommend I look at some paper. Tell me why it’s interesting, including page numbers. I’m going to have to learn to say no to many requests, as I’m overextended on many fronts. But the blog will continue.
PPS. In the previous email I mentioned my frustration with my iPad. In Italy I tried to answer emails, but every time I typed a word it automatically converted it into another word–perhaps Italian (some words I didn’t recognize.) So I eventually gave up.