Fed’s Bullard: Reiterates the Fed May Need to Increase QE if Inflation Slows

Federal Reserve Bank of St. Louis President James Bullard dissented from the FOMC’s June 19 decision to maintain the pace of asset purchases saying the central bank may need to increase monthly asset purchases above the current $85 billion pace if inflation slows further below its 2 percent goal.


In an unusual move, Bullard published a press release on why he dissented:


Federal Reserve Bank of St. Louis President James Bullard dissented with the Federal Open Market Committee decision announced on June 19, 2013. In his view, the Committee should have more strongly signaled its willingness to defend its inflation target of 2 percent in light of recent low inflation readings. Inflation in the U.S. has surprised on the downside during 2013. Measured as the percent change from one year earlier, the personal consumption expenditures (PCE) headline inflation rate is running below 1 percent, and the PCE core inflation rate is close to 1 percent. President Bullard believes that to maintain credibility, the Committee must defend its inflation target when inflation is below target as well as when it is above target.


President Bullard also felt that the Committee’s decision to authorize the Chairman to lay out a more elaborate plan for reducing the pace of asset purchases was inappropriately timed. The Committee was, through the Summary of Economic Projections process, marking down its assessment of both real GDP growth and inflation for 2013, and yet simultaneously announcing that less accommodative policy may be in store. President Bullard felt that a more prudent approach would be to wait for more tangible signs that the economy was strengthening and that inflation was on a path to return toward target before making such an announcement.


In addition, President Bullard felt that the Committee’s decision to authorize the Chairman to make an announcement of an approximate timeline for reducing the pace of asset purchases to zero was a step away from state-contingent monetary policy. President Bullard feels strongly that state-contingent monetary policy is best central bank practice, with clear support both from academic theory and from central bank experience over the last several decades. Policy actions should be undertaken to meet policy objectives, not calendar objectives.


While President Bullard found much to disagree with in this decision, he does feel that the Committee can conduct an appropriate and effective monetary policy going forward, and he looks forward to working with his colleagues to achieve this outcome.


After the FOMC, a Bloomberg News survey showed that according to 44 percent of economists, a plurality, the bond buying will be cut by $20 billion at the Sept. 17-18 policy meeting. In my opinion, economists should give more credit to Bullard’s analysis and should not expect any tapering before December. The fact is that inflation will stay very low in the short term because:


1/ Global growth will not recover due to China’s slowdown. As a consequence, energy prices will not rebound.

2/ US growth will stay limited around 2% until fiscal issues will be solved (maybe at the end of Q3).

3/ In these conditions, employment conditions will improve slightly and wages’ increase will be contained.

4/ Real estate prices and rents will be affected by an increase in inventory.