Fed’s Bullard Is a “Little Nervous” About Low Inflation

St. Louis Federal Reserve President James Bullard continues to make his views on Fed policy known, giving a lecture in Germany on monetary policy options, as well as interviewing recently with The Wall Street Journal to discuss his fears over inflation.

Bullard feels that inflation is a particular worry, given that employment and growth have proven a bit stronger recently, with the U.S. beating job estimates last month, yet inflation sits at almost half the Fed’s target of 2 percent.

In Europe, their low inflation makes more sense given the recession and weak consumer demand as joblessness remains high in many countries, but Bullard says that “we don’t really have a good story,” adding that he’s a  “little nervous,” and that the central bank should take more action if prices don’t begin to pick up. The following chart shows the various recoveries among EU countries and the U.S.:

GDP Chart

Source: http://research.stlouisfed.org

 

Consumer credit has also rebounded recently, with more debt in nearly all areas being held by Americans, another sign that confidence is increasing and prices should be rising. For these reasons Bullard feels the Fed should commit to more stimulus, something which Fed Chairman Bernanke has said he would do this week, although his St. Louis counterpart feels that quantitative easing should continue to be a part of the equation if the inflation picture doesn’t change.

It’s not clear whether Bernanke will keep the easing dream alive for much longer though, after comments this week regarding the future of monetary policy. While the leader of the Fed did say that policy would remain “accommodative,” he also added that, “There is some prospective, gradual and possible change in the mix of instruments [we may use].” This kind of communication strategy has Bullard feeling that the central bank could do better, noting the possible need for press conferences after every Federal Open Market committee meeting.

Increased communication between central banks and markets is becoming more of the norm, though, as Mark Carney takes over the Bank of England, bringing his pioneering ‘forward guidance’ policy which gives markets more specific timetables for expectations on interest rates.

After markets initially reacted with shock to Bernanke’s June comments about tapering quantitative easing, Mario Draghi broke European Central Bank tradition by telling markets to expect low rates for an extended period of time. Keeping rates low in Europe, as well as keeping markets calm, is crucial as the central bank there looks to stimulate lending in places like Greece and Spain were investment is dramatically needed to mitigate recession. Borrowing rates for these countries are already high, despite historically low central bank rates, and uncertainty is only seen as a possible exaggerator of the problem.

*Editor’s Note: An earlier version of this article mistakenly referred to James Bullard as Charles Plosser. We apologize for the error. 

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