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The Federal Reserve: Recent History & Monetary Policy with Former St. Louis Fed President James Bullard · The Capitalism and Freedom in the Twenty-First Century Podcast

0:00
>> James Bullard: Bernanke was a democratizer.
0:03
He wanted the committee to provide input.
0:07
And I think the best way to understand Chair Bernanke is
0:12
that no one is more intellectually secure than the Nobel Prize winning chair.
0:19
So he wanted input.
0:21
He wanted to hear what different people had to say.
0:24
It didn't bother him if they said something that was counter to what he was
0:29
thinking.
0:30
He would certainly take it on board or dismiss it as he saw fit.
0:35
So I think once that democratization took place,
0:40
then that was inherited by Chair Yellen and Chair Powell.
0:46
So it's really the same way today.
0:49
I don't think you could run it the same way Greenspan ran it in the current
0:53
environment.
0:54
I think it's a different kind of committee today.
0:59
[MUSIC]
1:08
>> Jon Hartley: This is the Capitalism and Freedom the 21st Century podcast,
1:11
an official podcast of the Hoover Institution Economic Policy Working Group
1:14
where we talk about economics, markets and public policy.
1:17
I'm Jon Hartley, your host.
1:19
Today my guest is James (Jim) Bullard,
1:21
who is the dean of the Mitch Daniels School of Business at Purdue University.
1:24
Jim previously was the 12th president of the Federal Reserve bank of St.
1:29
Louis, a position he held from 2008 till 2023.
1:33
Welcome, Jim.
1:34
>> James Bullard: Glad to be here.
1:35
Thanks for having me.
1:37
>> Jon Hartley: Well, thanks so much for joining us, Jim.
1:39
You're a Midwest guy, you were born in Wisconsin, but you grew up in Minnesota.
1:43
You did your BA at St. Cloud University and your PhD at Indiana University.
1:48
How did you first get interested in economics?
1:51
>> James Bullard: When I was young, I had the vision of doing a sort of
1:56
computer science plus economics as an undergrad,
2:01
and that is my undergraduate degree.
2:06
And I would say my career has kind of worked out.
2:10
So I must have had rational expectations when I was young.
2:13
But a lot of the work that I've done over the years in economics
2:19
has been algorithms, solving macroeconomic models,
2:24
talking about how expectations affect macroeconomics.
2:29
And a lot of that has had computational intensity to it.
2:33
So it did turn out to be a combination of operations research or
2:39
computer science plus economics.
2:42
So that was the original vision.
2:44
And then I went to graduate school and the rest is history.
2:49
>> Jon Hartley: Well, it's amazing.
2:50
Well, I feel like you're certainly, I'm sure, in the Midwest during
2:54
the rational expectations revolution when that was going on.
2:58
Certainly I think that pervaded a lot of those so-called freshwater departments.
3:03
And Indiana as well, you had a lot of folks from,
3:07
from the Federal Reserve System.
3:09
I know Chris Waller was a professor there at one point.
3:14
I'm just curious, so you've had a long and quite amazing career in
3:19
the Federal Reserve System and specifically at the St. Louis Fed.
3:24
Before becoming president of the St.
3:26
Louis Fed, you were the deputy research director there for many years.
3:31
What is it like being a deputy research director at a regional Fed bank?
3:37
>> James Bullard: Well, I loved it, I love my whole tenure in the Fed, but
3:41
I especially loved being on the research staff.
3:45
We had a great research department with a long tradition dating way back
3:50
was really the first research department to do academic style
3:54
research in the Federal Reserve System.
3:57
And I was coming along much later than that.
3:59
But then in addition we were able to build up the department even further as we,
4:05
after I became president, Chris Waller was the research director for about a decade.
4:12
So we had a, we really had a great run.
4:16
And I thought, you know, I just learned so
4:19
much economics from being at sort of a crossroads.
4:23
I would say a lot of the Federal Reserve banks with strong research
4:28
departments like St. Louis are places where you pretty much see, sooner or
4:33
later you pretty much see everybody who's doing something that's anywhere related
4:39
to monetary policy or macroeconomics, which means most of macroeconomics.
4:45
So I think it was a great chance to have colleagues that were
4:49
interested in these issues and to be able to see all, you know,
4:54
have a bird's eye view of all the work that was going on in the field.
4:59
>> Jon Hartley: I mean, the St Louis Fed, I feel like known for many things.
5:04
One, it's known for being the home of Fred,
5:08
which is how a lot of people download their macro time series now.
5:14
And it's a great database full of tons of macro time series that anybody can
5:18
access for free.
5:19
I feel like that's one really understated, incredible contribution from the St.
5:25
Louis Fed and the Federal Reserve System in general.
5:29
I guess you also had this other sort of part of the St. Louis Fed where I think
5:34
it's just very well known for being very good on economic history.
5:37
And I know it's got it's Fraser database, it's got a bunch of things.
5:41
I mean, it's also sort of got this link to monetarist economics,
5:46
old monetarist sort of economics.
5:48
I don't know if maybe Milton Friedman visited and I'm curious or
5:52
maybe there were a lot of Milton Friedman students who had migrated to the St.
5:56
Louis Fed over time.
5:57
I'm curious, what is the history behind the St. Louis Fed?
6:01
>> James Bullard: Yeah, well, a guy named Homer Jones was hired in 1958.
6:07
Homer Jones was at Rutgers when Milton Friedman was a student there.
6:13
And then they became long, long time friends within economics.
6:19
And so later Homer Jones came to the St.
6:22
Louis Fed and Milton Friedman was at Chicago.
6:26
So that's how the monetarist aspect of it got going.
6:30
But I think it was more attitude that these were very
6:34
difficult problems to understand the economy and
6:39
understand monetary policy in a scientific sense.
6:44
And so you're gonna have to get serious about from a research angle and
6:48
you're gonna have to roll up your sleeves and dig in.
6:52
And that's very much what they did at that time in that
6:56
through the 1960s and into the early 1970s.
7:01
And so that kind of established the reputation of St. Louis Fed.
7:04
But we're many years beyond that now.
7:06
What I wanted to do as president is build on that.
7:10
Not claim that everything that they said was exactly right, but
7:15
try to build on that and
7:16
especially to carry forward the attitude that these are hard problems and
7:22
they take a lot of work to try to solve them and you can only make a certain
7:27
amount of progress on any given day because they're that difficult.
7:33
>> Jon Hartley: Yeah, it's fascinating.
7:34
I mean, the history there is, I think, quite interesting,
7:38
and worth thinking about looking into.
7:40
I'm curious, so you became president of the St. Louis Fed in 2008.
7:45
I mean, tell us, what is the selection process like for
7:48
becoming a regional Fed bank president?
7:50
I know, I think the outgoing director or the outgoing president of that given
7:54
regional Fed, I think, submits a few names to the regional Fed bank board, I think.
8:00
I think people that are less familiar with how the Federal Reserve System works.
8:04
You have these 12 regional banks in addition to the Federal Reserve Board.
8:09
The Federal Reserve board is in D.C. but
8:12
each of these regional Fed banks is kind of like a quasi governmental institution.
8:18
They have their own board of directors, and
8:23
those boards of directors are responsible for
8:28
choosing the president of that regional Fed bank.
8:33
Now, like, what directors can actually choose and
8:37
be part of that process has changed a little bit since Dodd Frank.
8:41
The banking, class A directors can't vote on presidents anymore.
8:46
But I'm curious, what is that whole process like?
8:50
And of course, these names I think,
8:52
have to be approved by the Federal Reserve Board.
8:54
And I think over time,
8:55
the Federal Board has maybe played a greater role in more recent years.
8:58
But I'm curious, going through that process,
9:00
as somebody who's actually interviewing to become a new regional Fed bank president,
9:05
what is that whole process like?
9:06
And who do you talk to?
9:08
And, and like.
9:09
>> James Bullard: Yeah, you're right.
9:13
Each of the banks has a board of directors, and
9:18
these directors are business and
9:21
banking leaders from across that particular district.
9:27
And we had some great directors that really did a great job for
9:31
us while I was president of the bank and really helped us a lot.
9:34
But when it comes time to choose a new leader,
9:38
it's really up to the board to choose that new leader.
9:42
Typically, they'll hire a recruiting firm.
9:46
They'll try to have a broad search, certainly a nationwide search,
9:53
and then they try to make a good judgment about
9:57
somebody that can be a leader in monetary policy,
10:02
but also be a leader for the bank and manage the bank.
10:07
I mean, the St Louis Fed, when I left, is right around 1500 employees and
10:13
had plenty of work to do other than just the monetary policy and
10:18
the research department.
10:20
So there's quite a lot to manage at a high level.
10:26
And the board of directors takes this job very seriously in
10:30
trying to find somebody that can play both roles effectively.
10:35
I would say that for St Louis in particular, I think the notion
10:41
of carrying on the research tradition is very prominent.
10:46
And I'm sure that weighed on the board of directors when they replaced me.
10:51
But one of the things that happened after Homer Jones and Milton Friedman, which
10:57
is in the distant past, but the other banks then copied St Louis because St.
11:02
Louis had a lot of success and they created their own research department.
11:08
So Minneapolis is one of the most famous ones.
11:12
They had Tom Sargent visiting and Ed Prescott later,
11:16
and Chris Sims, all of whom won Nobel Prizes.
11:20
So Minneapolis, I would say, sort of copied the St Louis model.
11:26
And then later all these other banks also produced powerful research
11:32
department, San Francisco, Chicago, and many others.
11:37
So I think. >> Jon Hartley: [INAUDIBLE] Richmond, Fed.
11:39
>> James Bullard: Yeah, Richmond, really all of them are pretty good right now.
11:43
So now I think what you have is this very good research system
11:48
across the Fed where the different banks can provide sort
11:53
of independent input on these important questions.
11:57
They come from different research angles and they might have different data,
12:01
they might have different ideas.
12:03
And that joint process I think leads to very good
12:08
leadership on the part of the Fed for intellectually,
12:13
for pursuing great policy for the United States.
12:18
>> Jon Hartley: I think that the whole Federal Reserve System has changed quite
12:23
a bit over time in the sense that, one,
12:26
they become the largest employer, I think of PhD economists.
12:31
You have a couple hundred PhD economists at the Federal Reserve Board and
12:36
hundreds, hundreds more throughout the system.
12:40
But you know,
12:41
it wasn't always the case that the Federal Reserve was run by PhD economists.
12:46
I think in the earlier part of the 20th century, and
12:49
maybe even through the middle of it, it was largely run by lawyers and bankers.
12:54
And it's interesting how the number of PhDs I think might
12:58
have even peaked 10 or 15 years ago.
13:02
And I think now there's fewer PhDs on the FOMC today than perhaps there was 10,
13:07
15 years ago.
13:09
So I know there's always this struggle, I think, between PhD economists and
13:14
lawyers in terms of vying for these sorts of economic policy positions.
13:20
But I'm just curious, as a regional Fed bank president,
13:25
what is the routine like in terms of your interactions with the chair and
13:31
the fed board in D.C along with other FOMC members?
13:36
You're president of the St Louis Fed alongside three different chairs,
13:41
Bernanke, Yellen, and Powell.
13:44
And you're also staff under the Greenspan Fed and
13:47
you were going to FOMC meetings in the Greenspan Fed era?
13:51
I mean, did their styles change over time or with different chairs?
13:57
Have styles changed quite a bit on the FOMC in
14:00
terms of deference to other FOMC members?
14:02
I mean, my understanding is that Greenspan kinda just moved and
14:08
everybody sort of was prodded to kind of follow alongside what Greenspan wanted.
14:14
Whereas my understanding is over time I think it's become a little bit
14:18
more democratic and deferential to different FOMC members.
14:21
But when you go to these meetings every six weeks, I mean,
14:25
my understanding is that some chairs have had, have made more of an effort to have
14:30
one on one meetings with regional Fed bank presidents before the actual meetings
14:35
happen I'm curious what is that experience like as a regional Fed bank president?
14:40
>> James Bullard: Yeah, I think [COUGH] the best way to understand it is that
14:46
Greenspan was an imperial chair so he very much saw himself as the decider and
14:53
the others as maybe weak advisors and that was very much the style.
14:59
He would give his ideas about what should happen
15:03
at the meeting he would give that first.
15:07
I think there was less emphasis on the future path of policy in the 90s and
15:13
early 2000s than there would be today so that's been a major change.
15:20
[INAUDIBLE] Yeah, definitely, very limited or almost no forward guidance.
15:28
I think toward the end of his term, Greenspan,
15:30
started experimenting somewhat but very carefully with forward guidance.
15:35
And then I would say that a major change occurred
15:39
with Ben Bernanke becoming governor and
15:43
later becoming chair because Bernanke was a democratizer.
15:49
He wanted the committee to provide input and
15:54
I think the best way to understand Chair Bernanke is that.
16:00
You know, no one is more intellectually secure than the Nobel Prize winning chair.
16:06
So he wanted input, he wanted to hear what different people had to say and
16:10
he didn't, it didn't bother him if they said something that was counter to what
16:15
he was thinking.
16:16
He would certainly take it on board or dismiss it as he saw fit.
16:22
So I think once that democratization took place,
16:27
then that was inherited by Chair Yellen and Chair Powell.
16:33
So it's really the same way today.
16:35
I don't think you could run it the same way Greenspan ran it in the current
16:40
environment.
16:41
I think it's a different kind of committee today.
16:46
And I also think that.
16:47
So the other thing about Bernanke is it's all about transparency.
16:51
And really the transparency revolution that got started a little bit under
16:55
Greenspan really came to the fore under Bernanke.
16:59
And this means that the public and
17:01
the global financial markets hear much more about what the debate is among
17:06
members of the committee because committee members are talking pretty
17:11
much all the time about how they're interpreting the most recent data,
17:16
what they think about the future path of policy and all these things.
17:21
I've said that I think that's a fantastic thing because markets
17:25
want to know what's the committee thinking.
17:29
And what better way to do that than just have people doing interviews and
17:34
various kinds of speeches and reacting to the latest data and
17:39
shading their positions subtly in one direction or another on any given day.
17:44
So I think there's a lot more information out there and I think that creates
17:49
better policy as opposed to global financial markets having to guess,
17:54
do seven people think this or do five people think that are on the committee?
17:59
They pretty much tell you in their speeches and
18:01
in their interviews where they're at and how they're interpreting the last data.
18:05
And you can get a very good read on the committee most of the time through that
18:09
process.
18:11
>> Jon Hartley: Yeah, and it's fascinating too.
18:13
I mean over that time period under the Bernanke, Fed,
18:18
you had things like the introduction of the SEP for
18:21
guidance famous dot plots of where all the committee members
18:26
forecast various macroeconomic variables like inflation,
18:31
unemployment, but also where they forecast their own
18:35
interest rate reaction function to be, I guess.
18:39
>> James Bullard: I mean the dot plot would have been considered absolutely
18:44
outrageous in the Greenspan era, but
18:47
came to be accepted as a kind of standard not just at the Fed,
18:52
but even more so at some of the other central banks that did,
18:56
in bank of England in particular published an inflation report
19:01
ECB has a regular forecast round and publishes all that material.
19:07
So I think that kind of thing did not occur certainly under Greenspan,
19:12
but that's part of the transparency revolution.
19:16
>> Jon Hartley: Absolutely, and
19:17
even declaring that the Fed has a 12% inflation target,
19:21
even though it's arguably something that tacitly happened in the 1990s and
19:26
2000s when all these other central banks started explicitly announcing
19:31
various inflation targets, starting with the Reserve bank of New Zealand, and they
19:36
famously came up the first central bank to declare their targeting 2% inflation.
19:42
And I think the bank of Canada and others followed quickly thereafter.
19:46
But the Federal Reserve didn't officially or
19:49
formally announce its 2% target until 2012.
19:52
I mean, what were those discussions like in terms of that sort of transparency and
19:58
officially adopting something that's pretty critical to the overall framework?
20:03
>> James Bullard: Yeah, I think inflation targeting really,
20:07
as you just outlined, started in the early 1990s,
20:12
but I think it was really the run up to the establishment of
20:17
the ECB in 1998, 1999 and the years ahead of that,
20:22
where an inflation target was talked about in Europe at length and
20:27
finally decided to be famously 2% or less as the inflation target.
20:34
But that's a major central bank.
20:36
The Fed didn't join immediately, but I think implicitly did join
20:41
all through the 2000 and finally named a target in 2012.
20:47
Now Greenspan opposed inflation target.
20:54
He said he wanted flexibility.
20:57
But that runs counter to what the literature was saying.
21:00
The literature was saying exactly that you had to commit and so
21:03
that markets knew what your target was, where you were heading,
21:07
as opposed to the Greenspan notion that you didn't wanna tell them where you
21:11
were heading cuz you might wanna go in a different direction.
21:14
But that idea has passed its prime and
21:18
it's all about commitment to the target now.
21:24
And Chairman Bernanke wanted to establish a target.
21:28
He said so when he took the chair, but
21:31
he didn't find the right moment to do it until 2011, 2012.
21:36
And we worked on that during 2011,
21:40
a group of presidents tried to draft a statement
21:45
that would be a way to establish an inflation target.
21:52
And that statement got vetted with other presidents and
21:55
eventually by Bernanke and by the Board of Governors.
21:59
And that became in January 2012, the statement of long run.
22:06
I forgot what it's called, long run objectives or
22:09
long run goals of the committee.
22:11
And, and that's the one that the committee will be revisiting
22:16
here this year or next year, I guess next year.
22:19
And that's the one that established inflation targets.
22:22
So I think that was an important development for the US and
22:27
also informed decision making between 2009 and 2019,
22:32
when inflation was actually below the target, as opposed to being above,
22:38
which is where we usually were in the earlier era.
22:42
>> Jon Hartley: And since, yeah, I feel like the Fed's framework has evolved even
22:47
further than that in more recent years.
22:49
You have the flexible average inflation targeting framework
22:54
review under Rich Clarita's tenure as vice chair.
22:59
He played, I think, a pretty important role in that.
23:03
I mean, you were president of the St Louis Fed during some very
23:07
consequential economic times.
23:09
The Great Recession and the aftermath of it,
23:12
as well as the COVID 19 pandemic and its aftermath.
23:16
How did these episodes shape your thinking and
23:19
what do you think the Fed did well over this period?
23:22
What do you think the Fed should have done differently over this period?
23:27
>> James Bullard: Yeah, I'd say the global financial crisis
23:32
was an unmitigated global disaster and
23:37
it started on in US Financial markets.
23:42
That's what was disconcerting about it.
23:44
But not in the US Banking sector, really, the US shadow banking sector.
23:49
And it was clear that we had a long way to go to provide better financial stability.
23:56
But I do that FED reacted.
23:59
Well to that and has better radar today than we once would have
24:05
had about potential for financial instability to develop.
24:10
So I think that was a plus.
24:12
I think the other thing that this brought up,
24:17
the recovery from the global financial crisis was so slow and took so long.
24:25
That I think it raised a lot of questions about how to conduct monetary policy in
24:30
an environment of extremely low inflation, extremely low nominal interest rates.
24:36
I think we have a mixed record actually on being able to stimulate
24:40
the economy all that well during that era.
24:44
And we tried many different things, but it was okay.
24:51
I think it was moderately successful, but it was certainly not a brilliant success.
24:56
And finally, the pandemic came along.
24:59
I think the pandemic was such a big shock and
25:02
a global shock that it was enough to knock us out of that equilibrium and
25:08
into a new one, which I think is where we are today.
25:12
And this got me thinking a lot about regime switching as a way to
25:17
think about what happened between 2009 and 2019.
25:21
That there are two possibilities, at least, for
25:25
the medium term outcomes in the US economy.
25:29
One is a very low nominal interest rate, low inflation equilibrium.
25:33
And another is a more normal, or what I would think of as a more
25:38
normal equilibrium, with a higher real interest rate,
25:43
higher nominal interest rates, and faster growth probably.
25:48
And I think that's a major challenge is to be able to think about
25:54
what makes you switch between these two possibilities.
25:59
And how can you conduct monetary policy knowing that those two
26:03
possibilities are out there?
26:07
But for now, I think we have probably been knocked out of the very low
26:12
nominal interest rate equilibrium.
26:14
And now, I think the better comparisons are to the period from 2000 to 2007 or
26:21
the period from, let's say, 1995 to 2000.
26:26
I think those are better models for what could happen in the US
26:31
economy now as opposed to the 2009 to 2019 period.
26:36
>> Jon Hartley: So I just want, I guess,
26:37
maybe lightning around just a few questions just in general.
26:42
And I mean, you've had such an amazing and
26:45
very long tenure on the FOMC and you've seen so many things.
26:50
So I'm just curious that there are few general thoughts on a few different
26:54
things.
26:55
So one, you're going back to, I guess, the 2010s.
27:01
There was this introduction of what one would call Delphic forward guidance,
27:07
the SEP.
27:08
I mean, this is sort of you give contingent forecasts and
27:11
contingent policy projections.
27:13
Was that a good addition in your mind or
27:17
one that I think one that should be revisited?
27:21
I know there have been some critics saying that the regional
27:26
Fed Bank presidents should actually be owning their dot.
27:30
And rather than sort of keeping it a secret or maybe adding confidence
27:35
bands around projections, I think that was a Laura Adam Ester suggestion.
27:42
Given that there's uncertainty with all these sorts of forecasts of GDP,
27:47
unemployment, inflation, and the future path of policy.
27:51
Was the addition of Delphic forward guidance, like the SEP,
27:54
sort of overall good addition in your mind?
27:59
>> James Bullard: Generally speaking, I think it was a good addition, but
28:02
as you may know, I've actually thought about, well, as president,
28:07
to actually drop out of the dot plot.
28:09
[COUGH] Because I think there are some inherent problems with it
28:15
that just have not, the committee has just not been able to deal with.
28:21
So I guess my assessment is that the dot plot was introduced
28:26
fairly quickly over a period of maybe two or three meetings.
28:30
And I think the view was that, okay,
28:33
if this doesn't work exactly right, we can make changes in the future.
28:38
But instead, it got frozen into place, and so now you have this.
28:43
The dots are not connected, as you just pointed out.
28:46
You can't tell which dot goes with which other dot for some other variable.
28:54
I think the horizons are weird,
28:56
you've got the horizon shortening as you go through the year so
29:01
that the September meeting in particular only has a horizon of about 90 days.
29:06
So you're basically saying exactly what you think should
29:10
happen at the next two meetings.
29:12
I've always thought that was fraught for
29:14
the committee if the data doesn't cooperate.
29:17
And sometimes the data didn't cooperate and
29:19
the committee got into trouble at the December meeting.
29:22
So I think that's awkward, but all of this,
29:26
the main thing I would say about this is all of this could be done better.
29:31
You could just have a quarterly monetary policy report and
29:36
you just put out a forecast in that report, probably a staff forecast.
29:43
And then let members of the committee say which parts of that forecast they agree
29:47
with or don't agree with.
29:48
That would allow for
29:49
a more fulsome discussion of everything that's affecting the economy.
29:54
It could be 30 or
29:56
40 pages instead of this cryptic couple of graphs that we put out now.
30:02
So I just think a lot could be done here.
30:04
I think the committee's been frozen in place a little bit around this.
30:10
It's probably better to have the dot plot than not.
30:13
The other thing about it is that not to ramble on too long,
30:18
but another thing about it is that the statement
30:22
of the committee is actually a product of the committee.
30:27
So the committee has talked about this, and you alluded to this earlier.
30:31
But the chair does go around and talk to everybody ahead of the meeting,
30:36
which I think was a great innovation and makes a lot of sense.
30:40
It's a big, complicated meeting,
30:42
you can't come into the meeting not knowing quite what's gonna happen.
30:46
You have to have a pretty good idea about what's gonna happen.
30:49
And I think that it helps that the chair can round up opinions ahead of time.
30:55
But some that statement is a product of the committee, whereas the dot plot is
31:00
a product of independent assessments that really isn't coordinated at all.
31:06
So sometimes the dot plot doesn't tell the same story as the statement.
31:11
And then the chair is in a position of having to play down the dot plot or
31:16
sometimes play up the dot plot, and this confuses markets.
31:21
So I think that's been a source of sort of miscommunication at points.
31:27
And you really don't know what the dot plot is going to look like till
31:32
the Friday before the meeting, so the chair doesn't have that great of an idea.
31:39
So sometimes it has to be managed a little bit.
31:42
I mean, it can all be done, but it could probably all be done a little bit better.
31:46
>> Jon Hartley: Any thoughts on the Evans rule, Odyssey and forward guidance?
31:50
I mean, early on in the Great Recession, I think the Fed was really
31:55
struggling with trying to push Down forward interest rates.
32:02
And so you're really trying to get the Fed futures curve down several
32:07
years out of the curve was something that the Fed was trying to do and
32:12
I think was struggling with in various ways.
32:16
I think it was sort of trying things like quantitative easing which I
32:20
think did move maybe the 10 year rate by 10 basis points or so.
32:25
But the Fed was trying to do more in terms of rather than
32:29
just simply buying long term bonds.
32:31
I think trying to signal that the future path of the Fed funds rate or
32:36
the short term interest rate will be low for a very much longer period of time.
32:40
And that's kind of where some of this forward guidance SEP projections came in.
32:45
But then there was also this move to introduce odyssean forward guidance
32:50
which was time actually committing to a specific path based on some conditions.
32:57
So for those that aren't familiar with what the so
33:00
called Evans rule was this idea that was sort of announced I think in 2013.
33:05
That announced by the Fed that it would not raise interest rates from the zero
33:10
lower bound, the short term interest rate from the zero lower bound.
33:15
Unless unemployment fell I think below six and a half percent or
33:19
inflation went above I think maybe two and a half percent.
33:23
And I know around that time and maybe it wasn't a direct result of the Evans rule.
33:28
But I know that I think in 2013 maybe it was the August meeting
33:33
that there was just a big effect on actually moving the forward part
33:38
of the Fed funds futures curve down.
33:41
And I'm curious,
33:42
I mean are you a fan of the Evans rule type of odyssean forward guidance?
33:47
Is that something that you would be in favor of bringing back again in sort
33:52
of another post great recession, prolonged recession, a slow recovery type scenario?
33:58
>> James Bullard: Yeah, I would say the Evans Rule is a form of state contingent
34:03
forward guidance which I think is good.
34:06
The committee has struggled and continues to struggle with date dependent
34:11
forward guidance versus state dependent forward guidance.
34:15
So I think the natural instinct of many
34:20
is to want to give specific dates.
34:24
We won't do anything till March or
34:27
we won't do anything till January or something like that.
34:31
And we really got in trouble in August 2011 where Chair Bernanke came into
34:36
the meeting and it's in the transcripts.
34:38
And I think the first thing he said was we're gonna have to do something
34:43
different.
34:44
So I'm going to propose that we promised not to raise rates until 2013.
34:49
And that was a date contingent signal and not a,
34:54
that's saying that no matter what happens in the economy I'm not gonna do this.
35:02
And I think that that's completely at odds with what any model will tell you.
35:07
The model will tell you that you're trying to control
35:10
a system with your get the best outcomes that you can with your control variable.
35:15
You're going to have to react pretty much continuously to the data
35:19
that are coming in the same way that you would with a steering wheel on a car.
35:23
You wouldn't say, I'm not going to turn.
35:25
No matter what the road brings me, I'm not going to turn.
35:29
That's going to put you in the ditch.
35:30
So you're always reacting to changing conditions and
35:34
that's gotta be the spirit of monetary policy as well.
35:38
And I struggled to get the community to get away from
35:43
the instinct to want to provide date certain guidance.
35:49
Markets tend to want the date certain guidance because they want to focus
35:54
on other things that they're trying to do in financial markets.
35:59
But I think good policy suggests that you can't give it to them, so
36:02
you should give them only state dependent guidance.
36:05
And it hasn't helped that the committee is unable to write down
36:10
a state contingent policy rule like a Taylor rule.
36:14
Or some cousin of the Taylor rule that they'd be willing to think about and
36:20
commit to.
36:21
And so because they haven't been able to do that,
36:25
you sometimes get date based thinking comes to take advantage
36:30
of the committee and sometimes causes problems.
36:35
I think another case in point was June 2013.
36:40
I just entered at that meeting, that's the Taper Tantrum meeting.
36:45
So there I think the notion was that the committee
36:50
was going to back off its unlimited quantitative
36:55
easing even though the state of the economy was
37:00
actually not consistent with that at that date.
37:06
So that came off as extremely hawkish in global financial markets.
37:11
And real interest rates went up 100 basis points over the summer.
37:15
So it really can be quite dramatic, these effects.
37:20
And I think this is something that is very
37:25
much a live issue for the FOMC going forward.
37:31
>> Jon Hartley: So state contingent for
37:33
guidance over time contingent- [CROSSTALK].
37:36
Okay, so I'm very bad with running a lightning round here, but
37:41
I'll try it again.
37:42
>> James Bullard: [LAUGH] >> Jon Hartley: They're
37:44
all- >> James Bullard: Sorry,
37:44
I'm rambling on too much.
37:45
>> Jon Hartley: No, these are all prescient questions and
37:48
I feel like a lot of these deserve actually merit longer explanations and
37:53
responses cuz they're complicated.
37:57
So flexible average inflation targeting,
37:59
the idea that is sort of the Clarita kind of vice chair.
38:03
Idea that we should be averaging inflation over a longer period of time,
38:08
not just trying to hit 2% year over year.
38:10
But that there should be maybe some look back window.
38:14
And of course, this was all introduced well before the early 2020s inflation.
38:19
And the idea is, some have said it should be an asymmetric type of target.
38:25
And the idea was at some level to allow for some overrunning of 2% at the time,
38:31
and here's good idea or bad idea, should it be scrapped.
38:36
There's a lot of critics of it.
38:39
>> James Bullard: Yeah, I think the core issue is if you want to conduct monetary
38:45
policy and inflation is generally pretty close to target or above target.
38:53
We have most of the research in the last 25 years has been devoted to that case.
38:59
And in that case, I think it's fine.
39:01
You say, well, depending on how the real economy is performing,
39:04
depending on where inflation is, you could probably come up with a setting for
39:09
the policy rate that would be appropriate.
39:11
And in a lot of models that would even be optimal policy.
39:15
The question is when you get to a very low interest rate economy
39:20
with very low nominal interest rates, even negative nominal
39:25
interest rates, which we had in Europe and around the world.
39:30
That some huge fraction of government debt issued between 2009 and
39:35
2019 ended up being negative nominal interest rates,
39:39
unheard of before this all happened.
39:42
When you're in that kind of situation,
39:46
you can't lower the policy rate any further.
39:51
So you're doing these other types of policy with questionable effects.
39:56
And so it's not.
39:58
Clear that you can get back to your inflation target.
40:00
And you just get stuck at an equilibrium as closer to 0% inflation
40:04
than it is to 2% inflation.
40:07
Is that a problem?
40:09
And that's maybe the first question.
40:11
And then the second question, if it is,
40:13
it's certainly a problem in the sense that you're not hitting your inflation target.
40:17
So just from a credibility point of view, it's not very good and
40:21
you're not providing the stability about nominal income that you'd like to provide.
40:27
So how to conduct monetary policy in that circumstance, I think that's the question.
40:34
And this flexible average inflation targeting was
40:38
definitely designed with that scenario in mind.
40:41
And I think the committee still has to say, and
40:44
all central banks still have to say to be really good.
40:47
They have to say what would they do in that situation?
40:51
And then if it's high inflation,
40:53
then we'll consult the playbook that we inherited from Paul Volcker and
40:57
we'll raise interest rates sharply and we'll get inflation to come down.
41:02
That happened just in 2022 up until now.
41:06
And so all of that seems to work fine.
41:09
The question is what do you do in this other situation?
41:12
Or how do you stay out of that situation?
41:14
That's another good question to continue to ask.
41:17
So we've got ways to go on these issues.
41:23
>> Jon Hartley: Speaking of the early 2020 inflation, this is my next question.
41:27
We got this big inflationary spurt in May of 2021, April, May, June 2021.
41:35
And at first it seemed to be just used car prices.
41:38
By October it was pretty clear, it was pretty broad based,
41:41
hitting housing and a bunch of other areas in the consumer price basket.
41:46
But the Fed didn't ultimately start raising interest
41:51
rates until March of 2022.
41:54
Should the Fed have started to raise interest rates earlier in your opinion and
41:58
was like so called team Transitory wrong?
42:02
>> James Bullard: Yeah, well, Team Transitory was definitely wrong.
42:05
So I think we did do things in the second half of 2021
42:11
that I think were a tightening of monetary policy, but
42:16
they don't show up as actual increase in the policy rate.
42:22
What happened was that as of let's say, July 1, 2021,
42:27
the horizon for how long we would continue quantitative easing and
42:33
how long we would keep the interest rate at 0 was incredibly long.
42:39
It was like because the committee was expecting the recovery from
42:44
the pandemic to look like the previous recovery in 2009-2019.
42:49
So that one took 10 years.
42:52
And so they were kind of thinking, or we were kind of thinking that that would
42:57
be you know, that's the template for the post pandemic economy.
43:01
Now, if you look at it today, there's probably nothing so
43:05
V shaped in all of macroeconomics as what happened after the pandemic.
43:10
And so that kind of mentality,
43:13
which was that very slow recovery, that was all wrong.
43:18
And it was starting to become apparent, I would say by the summer of 2021,
43:23
but, but certainly became apparent in the second half of 2021.
43:28
So we did start reeling back in the very long time horizons,
43:32
instead of saying zero interest rates out to 2024, maybe only till 2023,
43:38
maybe only eventually, only to 2022, and then eventually we did raise rates.
43:45
I think the other thing that's really instructive about this
43:50
episode was that the very sharp increase in the policy rate
43:54
in 2022 was a very successful policy that was, you know,
43:59
475 basis point increases in a row with more to follow after that,
44:05
eventually to a policy rate of 5 and 3,8,
44:08
which was considered unthinkable even nine months earlier.
44:14
So I think that is exactly the moment where inflation started,
44:20
stopped rising and started falling.
44:23
And I think it's that credibility effect, the fact that the committee was able and
44:29
willing to say that it was going to defend the inflation target.
44:33
And so you better take this on board if you're out there in the private sector.
44:38
And the private sector did take it on board and
44:41
the inflation ended very rapidly compared to other inflations that we've seen and
44:46
before there could be a recession.
44:48
So I think this is a template for how to do this in the future.
44:53
This is all about credibility and Fed policy and
44:57
very little about the mechanics of, let's say, supply side disruptions.
45:05
And let me just say one other thing about supply side disruptions.
45:07
So for those that are listening here and
45:10
are thinking of aggregate supply demand diagram, what they're doing in their
45:15
minds is shifting that aggregate supply curve to the left.
45:18
And so output went down and prices went up.
45:23
That's fine, I suppose, but if you think that's all that happened and
45:27
the supply curve went back to normal, then the prices would have had to fall.
45:32
And that didn't happen.
45:33
The price level never fell, it just kept going.
45:37
It either went up or it stayed at the higher level.
45:39
And so I think it's strained.
45:42
A strange version of that story is to say that the only thing that happened was that
45:47
there was supply disruption and then the supply disruption went away.
45:51
There has to be much more to the story than that.
45:54
And that's why I think a big component of what happened was the demand
45:59
side component.
46:01
>> Jon Hartley: So I want to talk a little bit more about just research in general.
46:04
You're a great academic and great scholar on top of being a great policymaker.
46:10
You did a lot of research during your time at the St. Louis Fed.
46:15
I'm curious, part of what you oversee is deputy research director and
46:21
president are all these models that the regional Fed bank builds and maintains.
46:28
Often there's a house DSHE model which has considerations
46:34
about welfare and often has things like prices and
46:38
Phillips curve and so forth, three equation model.
46:43
And then you also have vector auto regressions which are kinda a theoretical
46:48
and are really just correlational and don't have too much economic intuition.
46:54
I'm just curious, you know, how do central bankers and
46:57
policymakers actually use these in your experience?
47:00
I mean on this podcast we've spent a lot of time talking to central bankers and
47:04
macroeconomists and
47:05
I think one recurring theme that's come about is that I feel like central bankers
47:10
often don't necessarily seem to find a whole ton of value in DSG models.
47:14
I mean vars typically produce better forecasts, albeit less, you know,
47:18
they have less economic intuition.
47:21
But I'm just curious, obviously, maybe some more research oriented monetary
47:26
policymakers may sort of think about the models a little bit more deeply,
47:30
especially if they were the ones that kind of developed that initial research like
47:34
folks like Rich Clarita.
47:36
But my understanding, my sense is that there's a massive subsidy toward this
47:40
kind of research that goes on at the Fed, but
47:43
there isn't a whole lot of usage out of it.
47:45
I mean, you can see in sort of academia there aren't a ton of people that work on
47:49
three equation and Kinsey DSG models,
47:51
at least compared to how many did 30 years ago.
47:54
I'm curious, what's your take in terms of what are the things that researchers.
47:58
That the, in the Federal Reserve system,
48:00
the central banks actually should be working on.
48:01
I mean there's a lot of really cool innovations out there,
48:04
like I think, GDP now.
48:06
Now casting, I mean it's been a huge contribution
48:08
that's been made by the Atlanta Fed and the New York Fed.
48:12
I'm curious, what are the sorts of research functions that you
48:15
think research teams should be focusing on more and
48:18
which things do you think they should be focusing on less?
48:23
>> James Bullard: Yeah, I would say post 1980s era has been
48:28
characterized by a sort of a big debate between people
48:33
that just wanted to use data based empirical results and
48:38
make policy based on that versus other people that
48:43
said [COUGH] you can't make any progress without more
48:48
specification of what you think is going on in the model.
48:55
And the outcome of that debate,
48:57
there was all this identification literature in the VAR literature that said
49:02
that there's really a model line behind your empirics and what is that model.
49:08
And I think that all kinda led to the conclusion that there's really
49:12
no substitute for a structural model.
49:15
And even if you say you don't have a structural model model,
49:18
you don't want to have a structural model, you still have one in the back of your
49:22
head that's guiding everything that you do.
49:25
So might as well write that down and make that explicit.
49:28
And so that whole line of thinking one carry the day.
49:33
I still love the ARS because I like simple characterizations of the data and
49:39
I understand that they're not totally right and they don't always take care
49:45
of everything that you need to take care of in order to make an inference.
49:50
And that's okay with me, but I think in good hands for
49:54
people that understand all those issues.
49:58
I think you still want to get some sense of where the data is and that guides you
50:03
into thinking about what the next steps in your structural modeling might be.
50:08
As for where the direction of future research is and
50:12
I think is very timely today it's all about heterogeneity and
50:17
I think the idea that you can simply abstract from the income distribution or
50:24
the wealth distribution or the consumption distribution is too much.
50:30
And to really understand the economy and the effects of monetary policy,
50:33
you really need to understand that entire distribution.
50:36
I would say that those issues are wide open.
50:41
I wouldn't say there's any model that is a clear victor on that,
50:48
but I actually have some research of my own on this.
50:55
So those that are listening wanna look at it.
50:57
It's in a volume called the Future of Macroeconomic Policy,
51:03
sponsored by the IMF and the Reeks bank in I'm sorry,
51:09
the Norwegian Central Bank.
51:13
And that paper makes an argument that a lot of the standard things that
51:18
we do in macroeconomics and that we recommend in macroeconomics
51:23
would extend to a world where you have realistic Gini coefficients for
51:28
income and wealth and consumption.
51:31
So it's an argument that we're not that far off as far as where we
51:36
need to be in terms of macroeconomic policy.
51:40
I'm sure there's refinements that could be made, but
51:43
the kinds of things that we do really do make a lot of sense.
51:46
Even when you have heterogeneity among households.
51:50
>> Jon Hartley: That's fascinating and amazing to hear about your research and
51:57
some of your early research on heterogeneity.
52:04
Heterogeneous agents is certainly a huge topic right now in macroeconomic research,
52:08
along with, I think, relaxing some of those full information,
52:12
rational expectations, assumptions, and so forth.
52:15
I'm curious, just pivoting a little bit,
52:17
what's it like now being a business school?
52:19
Dean at Purdue?
52:20
Purdue is very unique.
52:23
It's a very unique place in terms of has a lot of disciplines.
52:26
It's got a famous flight school.
52:28
You've got a lot of engineering, a lot of fantastic business and management courses.
52:34
Curious, what differentiates the Ms.
52:37
Daniels School in Purdue in your mind and what are your key objectives Dean?
52:42
>> James Bullard: Yeah, the the engineering school at Purdue is number
52:45
four in the nation.
52:47
So it's MIT, Stanford, Berkeley and
52:49
Purdue according to the some rankings, some of the most recent rankings.
52:54
So but Purdue turns out more more engineers than anybody in
52:59
the country this year.
53:00
So I think the strength is all in technology.
53:04
My story has been that technology ate the business world a long time ago.
53:10
And so what you need to do for the business school here going forward is
53:16
to integrate technology in business so it's tightly integrated.
53:22
It's one in the same thing to think about what's the latest
53:27
technology that could disrupt businesses in the future, but
53:31
also to have the engineers know basic business principles so
53:36
that they can take interesting ideas and
53:39
take them all the way to market and be successful.
53:44
So I think that sort of business and technology integration is going
53:49
to be very promising for the Daniels School here going forward.
53:55
And so hopefully we'll be able to carry that forward and
53:58
have lots of great students that come through our program and
54:02
are able to make great contributions in the business world, so
54:06
we have a lot of that already, but I think we can take it to an even higher level.
54:11
So I'm looking forward to working on that.
54:13
>> Jon Hartley: Well, it's exciting following everything that's been
54:15
happening in Purdue.
54:16
And I've met with President and former Governor Mitchell in the past,
54:21
and I know he was a very transformative president for
54:25
Purdue, and I think it's wonderful to see that he's the namesake for
54:29
the business school that you're now leading.
54:33
A real honor to have you on, Jim, and
54:35
it's amazing to hear about your career and ideas.
54:37
And you're wonderful what you're doing at Purdue.
54:39
And I think combining engineering and business is brilliant.
54:43
You think about CEOs like Jensen Wong and Elon Musk.
54:47
There are engineers and CEOs.
54:50
I think that's a terrific direction to take Purdue.
54:55
And really amazing hearing about your incredible career at the St Louis Fed.
55:00
Really want to thank you so much for joining us.
55:03
>> James Bullard: Well, thanks for having me.
55:04
This has been very fun, and thanks for doing the podcast, it's excellent.
55:10
>> Jon Hartley: This is the Capitalism and Freedom, the 21st Century podcast,
55:13
an official podcast of the Hoover Economic Policy Working Group,
55:16
where we talk about economics, markets, and public policy.
55:18
I'm Jon Hartley, your host.
55:20
Thanks so much for joining us.