I ran an interview with St Louis Fed president Jim Bullard in today’s FT. Here are a few of my takeaways from that discussion, in no particular order.
1. Bullard has an above-consensus forecast for growth in 2010 and sees unemployment as likely to come down by roughly a point and a half from its peak over the rest of the year - putting it in the 8.5 per cent to 9 per cent range at year end.
2. He thinks the Fed should wait for solid monthly job gains and a decline in the unemployment rate before starting to tighten policy – but that it need not wait for unemployment forecasts to converge to their natural rate. I pressed him on this and he was quite clear, reminding me that he thinks output-gap type analysis is very unreliable. I got the impression that non-farm payrolls were much more important to this policymaker than the level of unemployment.
3. He thinks the risk of fuelling asset bubbles will be an important factor in the committee’s deliberations on rates -although he did not say how he thought that debate will play out.
4. He wants to jump-start a committee debate about tightening via selling assets back into the market. The NY Fed thinks this would be very dangerous. Bullard says it need not be if properly planned and communicated in advance. We did not discuss this further, but I guess he might be thinking of allowing the market to predict the pace of sales, along the lines of gold sales by central banks.
Is this a crazy idea? I’m not sure. I do know his colleagues will take some persuading. I detect some sympathy with the Bullard view at the Bank of England. If the BoE at some point sold back assets through a transparent framework without massive market disruption, maybe that would spur a rethink at the Fed.
5. Bullard – like other members of the FOMC with some monetarist blood in their veins – is uncomfortable about keeping large levels of excess reserves in the system for a long time, because of the risk of inflation. The Fed leadership is much less concerned about the absolute level of reserves: they want to ensure the reserves do not impede the central bank’s ability to raise interest rates when it deems fit.
PS. Apologies: I had planned to post up a transcript of the Bullard interview but both tape-recorders petered out midway through. Next time…