WEBVTT - Former St. Louis Fed President James Bullard Talks Disinflation, Lower Rates Argument

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio News. Welcome to the campus

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<v Speaker 1>of Stanford University, to all of our Bloomberg viewers and

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<v Speaker 1>listeners worldwide, and to Jim Bullard, the former Saint Louis

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<v Speaker 1>Fedbank president now the dean of the Business School at

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<v Speaker 1>Purdue University. When you look at where we are, if

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<v Speaker 1>you were on the committee today, what would you think

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<v Speaker 1>needs to be done?

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<v Speaker 2>Yeah, I think the amount of disinflation that occurred in

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<v Speaker 2>the second half of twenty twenty three was a lot

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<v Speaker 2>two hundred basis points on the core PC twelvemonth inflation

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<v Speaker 2>rate from four point eight to two point eight. So

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<v Speaker 2>that's big in this game, and that's the kind of

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<v Speaker 2>thing we haven't seen on that variable in many, many years.

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<v Speaker 2>So very successful. But as you know, the January February

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<v Speaker 2>March reports stall a little bit, so but you're still

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<v Speaker 2>sitting at two point eight percent on a twelve month

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<v Speaker 2>basis So I think the challenge for the committee is

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<v Speaker 2>to somehow take that disinflation on board, because it does

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<v Speaker 2>mean that you should have a lower policy rate without

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<v Speaker 2>signaling that you're giving up on the last bit of

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<v Speaker 2>inflation eighty basis points that you need to get back

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<v Speaker 2>to two percent. So I think that's the fundamental challenge.

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<v Speaker 2>I think the wind's been blowing in the wrong direction

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<v Speaker 2>during the first quarter and into April.

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<v Speaker 1>Here, well, we have a lot of bond investors watching

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<v Speaker 1>these programs, listening to this show. Why do you think

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<v Speaker 1>we need lower rates? The argument from the Fed, from J.

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<v Speaker 1>Powell even on Wednesday, was that the economy is fine

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<v Speaker 1>right now where it is, and we don't need to

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<v Speaker 1>do anything.

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<v Speaker 2>Yeah, I mean, it's a good problem to have. The

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<v Speaker 2>Committee's been very, very successful here. Economy is growing at

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<v Speaker 2>a good pace, labor market is very strong. Today's report

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<v Speaker 2>a little software than the last time, but still very

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<v Speaker 2>solid report. And you know, inflation is above target, but

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<v Speaker 2>not nearly as much as it was, and certainly most

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<v Speaker 2>people think it's going to head back to target as

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<v Speaker 2>we go forward. So these are good problems to have.

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<v Speaker 2>So it's mostly about the tactics of exactly how to

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<v Speaker 2>play this going forward. Now, one thing is that inflation,

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<v Speaker 2>by the metrics I've been talking about, is only eighty

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<v Speaker 2>basis points above target, but the policy rate is some

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<v Speaker 2>two hundred and fifty basis points above neutral. So that's

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<v Speaker 2>a lot given that you're only a relatively small distance

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<v Speaker 2>from target, so that adjustment has to be made at

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<v Speaker 2>some point. They have to get going on that at

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<v Speaker 2>some point, but they want to do that, I think

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<v Speaker 2>when the wind's blowing in a little better direction for them.

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<v Speaker 1>Well, there's an argument that the things that are causing

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<v Speaker 1>inflation these days are not things that are affected by

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<v Speaker 1>monetary policy. So whether you're set too high or not,

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<v Speaker 1>it isn't good to bring down inflation from here.

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<v Speaker 2>No, I don't really think so. I think inflation is

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<v Speaker 2>a monetary phenomenon that's assigned to the central bank. The

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<v Speaker 2>central bank can control inflation over a five year period

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<v Speaker 2>over the medium term, and this episode is showing how

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<v Speaker 2>powerful that can be. So I think it really is

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<v Speaker 2>up to the pad to get the inflation rate in

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<v Speaker 2>the medium term. There certainly is noise and the data,

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<v Speaker 2>but that's not the main thing. I don't think the

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<v Speaker 2>noise can be positive or negative on a given day,

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<v Speaker 2>but the trends are controlled by the central bank.

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<v Speaker 1>We was there a risk if they leave policy too

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<v Speaker 1>tight for too long.

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<v Speaker 2>There is. I think it's not a huge risk, but

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<v Speaker 2>you know, inflation could come down as we go through

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<v Speaker 2>the rest of this year. I think many are thinking

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<v Speaker 2>that that's going to happen, and the policy rates way

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<v Speaker 2>up in the five percent range, which would be too

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<v Speaker 2>high for that kind of situation. So I think if

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<v Speaker 2>the right moment arises, they can make a move and

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<v Speaker 2>start to inch the policy rate down. Another thing I

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<v Speaker 2>think is that you don't have to You can make

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<v Speaker 2>a move without promising a whole sequence of moves. You know,

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<v Speaker 2>just make a move because you want to take on

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<v Speaker 2>board the good news that we've had since last summer.

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<v Speaker 1>Let me ask you, from your long experience on the committee,

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<v Speaker 1>how you think about the markets and their relationship to

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<v Speaker 1>the Fed. I did a chart yesterday and put it

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<v Speaker 1>out on x if people want to look for it.

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<v Speaker 1>It shows since July of twenty twenty three, the FED

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<v Speaker 1>funds rate hasn't moved. FED hasn't acted at all, and

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<v Speaker 1>yet the markets have gone like this. Does that affect

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<v Speaker 1>how you think about the transmission of policy? Or the

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<v Speaker 1>criticisms that you're behind or ahead of the curve? Do

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<v Speaker 1>those affect the way you think?

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<v Speaker 2>It's critically important? And I think economists even today are

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<v Speaker 2>still struggling to understand exactly how this complicated dance works

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<v Speaker 2>because it's not just the policy rate today but the

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<v Speaker 2>expected policy rate in the near term. One way to

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<v Speaker 2>look at that is the two year treasury yield, and

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<v Speaker 2>if you look at that over the last year or

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<v Speaker 2>year and a half, I've called that chart mister Toad's

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<v Speaker 2>wild ride, because at different junctures it looked like the

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<v Speaker 2>FED would go higher than it looked like the FED

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<v Speaker 2>might go lower. And while the policy rate itself is

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<v Speaker 2>a fairly smooth chart, the two year has been going

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<v Speaker 2>up and down because of expectations about FED policy. So

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<v Speaker 2>I do think that's critically important as to how policy works.

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<v Speaker 2>I think it helped the FED when we were raising rates,

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<v Speaker 2>the two year went out much faster than the actual

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<v Speaker 2>policy rate. That was helpful. And last December when Chair

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<v Speaker 2>Powell said that the you know, rate cuts were coming

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<v Speaker 2>into view, the markets ran with that and the two

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<v Speaker 2>year decline maybe one hundred bases points, and now it

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<v Speaker 2>has come all the way back, So it's a lot

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<v Speaker 2>of volatility. I know, the move index is high, so

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<v Speaker 2>it's very important.

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<v Speaker 1>I think you talked about the expected future path of

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<v Speaker 1>monetary policy. Now that you're not on the committee and

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<v Speaker 1>don't have to worry about it. What is your expected path?

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<v Speaker 1>Do you think they will cut this year? I do.

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<v Speaker 2>I do think they'll get the moment where it'll make

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<v Speaker 2>sense and you will get a little bit further disinflation

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<v Speaker 2>that'll allow them to come down out of the five

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<v Speaker 2>percent range. But it's going to be data dependent, and

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<v Speaker 2>you know, it's a fickle world, so you're when you're

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<v Speaker 2>looking at the data, you never quite know what's around

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<v Speaker 2>the corner in macroeconomic But I do think they'll find

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<v Speaker 2>their moment here to get the policy rate down, but

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<v Speaker 2>still stay restrictive. I think that's the key thing. Even

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<v Speaker 2>if they came into the high force somewhere, you know,

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<v Speaker 2>would that would still be a relatively high policy rate,

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<v Speaker 2>it would still be putting downward pressure on inflation. So

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<v Speaker 2>to me, the goal is to get from here to

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<v Speaker 2>get inflation to ask some coat down to two percent.

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<v Speaker 2>So you want this gentle landing. Ideally, this gentle landing

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<v Speaker 2>into two percent, So hopefully they can get that.

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<v Speaker 1>Colleges have been in the news a lot lately for

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<v Speaker 1>all the wrong reasons. One last question, what was easier

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<v Speaker 1>being on the FED board or being a deed into college?

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<v Speaker 2>That both very challenging. Jobs, and I like that. I

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<v Speaker 2>like to, you know, be actively involved in doing a

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<v Speaker 2>lot of things all the time. But we've got a

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<v Speaker 2>lot of growth at the Daniel School of Business and

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<v Speaker 2>a lot of support from our loans and many outside

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<v Speaker 2>the university as well. So it's a great project. It's

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<v Speaker 2>not easy, but it's it's a great project and we

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<v Speaker 2>had a lot of fun.

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<v Speaker 1>Jim Butllerd, former Saint Louis fed Bank President, now Dean

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<v Speaker 1>of the Daniel School of Business at Purdue University, thank

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<v Speaker 1>you for joining us today here