Speaker 1: Bloomberg Audio Studios, podcasts, radio News. Welcome to the campus
Speaker 1: of Stanford University, to all of our Bloomberg viewers and
Speaker 1: listeners worldwide, and to Jim Bullard, the former Saint Louis
Speaker 1: Fedbank president now the dean of the Business School at
Speaker 1: Purdue University. When you look at where we are, if
Speaker 1: you were on the committee today, what would you think
Speaker 1: needs to be done?
Speaker 2: Yeah, I think the amount of disinflation that occurred in
Speaker 2: the second half of twenty twenty three was a lot
Speaker 2: two hundred basis points on the core PC twelvemonth inflation
Speaker 2: rate from four point eight to two point eight. So
Speaker 2: that's big in this game, and that's the kind of
Speaker 2: thing we haven't seen on that variable in many, many years.
Speaker 2: So very successful. But as you know, the January February
Speaker 2: March reports stall a little bit, so but you're still
Speaker 2: sitting at two point eight percent on a twelve month
Speaker 2: basis So I think the challenge for the committee is
Speaker 2: to somehow take that disinflation on board, because it does
Speaker 2: mean that you should have a lower policy rate without
Speaker 2: signaling that you're giving up on the last bit of
Speaker 2: inflation eighty basis points that you need to get back
Speaker 2: to two percent. So I think that's the fundamental challenge.
Speaker 2: I think the wind's been blowing in the wrong direction
Speaker 2: during the first quarter and into April.
Speaker 1: Here, well, we have a lot of bond investors watching
Speaker 1: these programs, listening to this show. Why do you think
Speaker 1: we need lower rates? The argument from the Fed, from J.
Speaker 1: Powell even on Wednesday, was that the economy is fine
Speaker 1: right now where it is, and we don't need to
Speaker 1: do anything.
Speaker 2: Yeah, I mean, it's a good problem to have. The
Speaker 2: Committee's been very, very successful here. Economy is growing at
Speaker 2: a good pace, labor market is very strong. Today's report
Speaker 2: a little software than the last time, but still very
Speaker 2: solid report. And you know, inflation is above target, but
Speaker 2: not nearly as much as it was, and certainly most
Speaker 2: people think it's going to head back to target as
Speaker 2: we go forward. So these are good problems to have.
Speaker 2: So it's mostly about the tactics of exactly how to
Speaker 2: play this going forward. Now, one thing is that inflation,
Speaker 2: by the metrics I've been talking about, is only eighty
Speaker 2: basis points above target, but the policy rate is some
Speaker 2: two hundred and fifty basis points above neutral. So that's
Speaker 2: a lot given that you're only a relatively small distance
Speaker 2: from target, so that adjustment has to be made at
Speaker 2: some point. They have to get going on that at
Speaker 2: some point, but they want to do that, I think
Speaker 2: when the wind's blowing in a little better direction for them.
Speaker 1: Well, there's an argument that the things that are causing
Speaker 1: inflation these days are not things that are affected by
Speaker 1: monetary policy. So whether you're set too high or not,
Speaker 1: it isn't good to bring down inflation from here.
Speaker 2: No, I don't really think so. I think inflation is
Speaker 2: a monetary phenomenon that's assigned to the central bank. The
Speaker 2: central bank can control inflation over a five year period
Speaker 2: over the medium term, and this episode is showing how
Speaker 2: powerful that can be. So I think it really is
Speaker 2: up to the pad to get the inflation rate in
Speaker 2: the medium term. There certainly is noise and the data,
Speaker 2: but that's not the main thing. I don't think the
Speaker 2: noise can be positive or negative on a given day,
Speaker 2: but the trends are controlled by the central bank.
Speaker 1: We was there a risk if they leave policy too
Speaker 1: tight for too long.
Speaker 2: There is. I think it's not a huge risk, but
Speaker 2: you know, inflation could come down as we go through
Speaker 2: the rest of this year. I think many are thinking
Speaker 2: that that's going to happen, and the policy rates way
Speaker 2: up in the five percent range, which would be too
Speaker 2: high for that kind of situation. So I think if
Speaker 2: the right moment arises, they can make a move and
Speaker 2: start to inch the policy rate down. Another thing I
Speaker 2: think is that you don't have to You can make
Speaker 2: a move without promising a whole sequence of moves. You know,
Speaker 2: just make a move because you want to take on
Speaker 2: board the good news that we've had since last summer.
Speaker 1: Let me ask you, from your long experience on the committee,
Speaker 1: how you think about the markets and their relationship to
Speaker 1: the Fed. I did a chart yesterday and put it
Speaker 1: out on x if people want to look for it.
Speaker 1: It shows since July of twenty twenty three, the FED
Speaker 1: funds rate hasn't moved. FED hasn't acted at all, and
Speaker 1: yet the markets have gone like this. Does that affect
Speaker 1: how you think about the transmission of policy? Or the
Speaker 1: criticisms that you're behind or ahead of the curve? Do
Speaker 1: those affect the way you think?
Speaker 2: It's critically important? And I think economists even today are
Speaker 2: still struggling to understand exactly how this complicated dance works
Speaker 2: because it's not just the policy rate today but the
Speaker 2: expected policy rate in the near term. One way to
Speaker 2: look at that is the two year treasury yield, and
Speaker 2: if you look at that over the last year or
Speaker 2: year and a half, I've called that chart mister Toad's
Speaker 2: wild ride, because at different junctures it looked like the
Speaker 2: FED would go higher than it looked like the FED
Speaker 2: might go lower. And while the policy rate itself is
Speaker 2: a fairly smooth chart, the two year has been going
Speaker 2: up and down because of expectations about FED policy. So
Speaker 2: I do think that's critically important as to how policy works.
Speaker 2: I think it helped the FED when we were raising rates,
Speaker 2: the two year went out much faster than the actual
Speaker 2: policy rate. That was helpful. And last December when Chair
Speaker 2: Powell said that the you know, rate cuts were coming
Speaker 2: into view, the markets ran with that and the two
Speaker 2: year decline maybe one hundred bases points, and now it
Speaker 2: has come all the way back, So it's a lot
Speaker 2: of volatility. I know, the move index is high, so
Speaker 2: it's very important.
Speaker 1: I think you talked about the expected future path of
Speaker 1: monetary policy. Now that you're not on the committee and
Speaker 1: don't have to worry about it. What is your expected path?
Speaker 1: Do you think they will cut this year? I do.
Speaker 2: I do think they'll get the moment where it'll make
Speaker 2: sense and you will get a little bit further disinflation
Speaker 2: that'll allow them to come down out of the five
Speaker 2: percent range. But it's going to be data dependent, and
Speaker 2: you know, it's a fickle world, so you're when you're
Speaker 2: looking at the data, you never quite know what's around
Speaker 2: the corner in macroeconomic But I do think they'll find
Speaker 2: their moment here to get the policy rate down, but
Speaker 2: still stay restrictive. I think that's the key thing. Even
Speaker 2: if they came into the high force somewhere, you know,
Speaker 2: would that would still be a relatively high policy rate,
Speaker 2: it would still be putting downward pressure on inflation. So
Speaker 2: to me, the goal is to get from here to
Speaker 2: get inflation to ask some coat down to two percent.
Speaker 2: So you want this gentle landing. Ideally, this gentle landing
Speaker 2: into two percent, So hopefully they can get that.
Speaker 1: Colleges have been in the news a lot lately for
Speaker 1: all the wrong reasons. One last question, what was easier
Speaker 1: being on the FED board or being a deed into college?
Speaker 2: That both very challenging. Jobs, and I like that. I
Speaker 2: like to, you know, be actively involved in doing a
Speaker 2: lot of things all the time. But we've got a
Speaker 2: lot of growth at the Daniel School of Business and
Speaker 2: a lot of support from our loans and many outside
Speaker 2: the university as well. So it's a great project. It's
Speaker 2: not easy, but it's it's a great project and we
Speaker 2: had a lot of fun.
Speaker 1: Jim Butllerd, former Saint Louis fed Bank President, now Dean
Speaker 1: of the Daniel School of Business at Purdue University, thank
Speaker 1: you for joining us today here