One of the most vocal officials has been St. Louis Fed President James Bullard. He often pushes the envelope of debate at the central bank, and he is the last top official to speak before the Fed’s big decision. In an interview with The Washington Post, he said not raising rates in September was a “mistake" and that the U.S. economy could be ready to take off.
The transcript below has been edited for length and clarity.
Washington Post: Let’s start with Friday’s jobs numbers. Everyone is saying this is cementing the Fed’s liftoff in December. What do you think?
Bullard: I thought it was is a very strong report. I think the monthly average of 218,000 is very promising for the U.S. economy. I think it shows it was probably a mistake to delay from September, when people were concerned there was a slowdown in the fall. That hasn’t really materialized. I will argue for a move in December. I don’t want to prejudge what the committee might do, but that will be my position.
WP: An actual mistake not to move in September? What are the consequences, then? Is the Fed already behind the curve?
Bullard: The timing of the rate hike is probably not critical, and so we can certainly make up for the fact that we didn’t move earlier.
WP: You guys have been saying for a long time that it’s not just the first increase that matters: It’s the entire path. Let’s talk about what gradual means.
Bullard: There’s been so much pressure on this first move, and you can kind of understand it because we haven’t moved since December 2008. That’s seven years. We’ve been pinned down to zero. If we do move in December, it will certainly be momentous. It will be a great signal I think for the U.S. economy: It does signal confidence. It does signal that we can move away from emergency measures, finally.
But you’re right, the debate will immediately turn to how will normalization proceed? My main concern about that is we remain data dependent, and we do not get locked into a mechanical pace of rate increases the way that we did in 2004 to 2006.
In that sequence, for those that remember it, we raised the funds rate a quarter percent at every meeting for 17 meetings in a row. I’m virtually certain that was not optimal policy.
At the time, we were congratulating ourselves that this was a very organized way to go about the normalization process. But in the end, we really got burned with the huge crisis and a housing bubble that ran far out of control. And when it collapsed, it caused a major global macroeconomic disaster. So I don’t think we want to be in the position of trying to telegraph a mechanical rate hike path the way we did in that situation.
We’re going to have to be more attentive to data than we were in 2004-2006. The committee’s going to have to be willing to pause in some circumstances when things are not looking as good as expected or go faster in other circumstances when the economy is improving faster than expected and the inflation outlook is more robust than we had previously thought.
WP: When you look at the political environment that’s facing the Fed right now, how concerned are you about the threats to Fed independence?
Bullard: I would prefer to see the Fed more in bipartisan balance in the Congress. I don’t mind at all getting feedback and getting criticism. I think it’s a healthy part of the democracy. We’re a creature of Congress, and if Congress is unsatisfied with the way this is operating, they certainly have the prerogative and duty to change things in a way that are more conducive to what they want.
However, I don’t like it to get out of bipartisan balance. I would like to see equal criticism from both sides. I think it has tilted more toward the Republican Party in the last five years.
Look at the confirmation votes for Fed chairs, let’s say. You can look at Alan Greenspan, I think he got 98 votes and maybe a no vote on the left and one no vote on the right. Ideally, that’s where you’d like to be as an independent agency. We’re not there right now. We have a lot of critics and a lot of people that are upset with our emergency measures and the way we’ve conducted policy. I’d like to think we could get back to a more bipartisan balance in the coming years.
WP: When you review the last seven years that the crisis occurred and the actions that the Fed has taken since then, would it ever have entered your imagination in, say, 2007 that the Fed ever would provide as much stimulus as it did for the economy?
Bullard: No, I would not in 2007 — certainly not in 2007, or even 2008 or 2009 — think that we would be in the position that we’re in today. Historically, when you had big shocks, you also had a period of bounceback that was stronger than what we actually got here. I certainly did not predict that things would linger this long, seven years later. I think that’s been the major surprise in the aftermath of the big crisis.
WP: Has that fundamentally altered any of your views in how the economy operates or what the Fed’s role should be?
Bullard: The crisis has certainly given me a lot more respect for the zero bound and nominal interest rates and the implication of that for conventional monetary policy. It makes you think hard about other ways to conduct stabilization policy. It makes you think really hard about what it is that we think we’re doing when we’re conducting even ordinary monetary policy. I think all of these things have been very challenging during this era.
Part of the reason that I’m in favor of normalizing is to try to get back to the equilibrium that we enjoyed between 1984 and 2007, which were really halcyon days for the U.S. economy in retrospect. We had long expansions with only relatively minor recessions. We had a monetary policy that was well understood, both by policymakers and by markets. It was studied intensively, lots of empirical work, lot of theoretical stuff done. We were in a situation where policy and markets were all very comfortable with the way the economy operated, and we thought we understood it.
Since 2009 we’ve been at zero. We’ve got these problems with how you conduct stabilization policy and do they really work? And if they are working, how do they work? This is far more troubling. It’s far harder to coordinate expectations. It’s far harder for markets to be on the same page as policymakers. There is a lot of confusion.
If we could get back to the equilibrium that we loved during the '80s, '90s and up until the crisis in the 2000s, then I think that's something we can understand and where we can operate effectively.
WP: That’s assuming that’s achievable and that period, the Great Moderation, was not actually the aberration.
Bullard: We certainly felt at the time that we had much better monetary policy than we had earlier in the 20th century. We had not solved every problem, but we could tell a good story about how this worked, and we got good results.
WP: What do you think is the biggest risk facing the Fed as it starts to normalize policy?
Bullard: Risks abound, and they’re on all sides. There’s a risk of being too technical and not responding enough to data and letting situations that sort of fester and grow during the normalization process. There’s a huge temptation to tell ourselves a story, as we did during the housing bubble, “Oh, that’s not going to be problem. That’s not going to blow up and cause a recession.”
There is some risk that we would fall behind the curve, and I’ve argued that we’re entering what is probably a boom phase for the U.S. economy, barring a major shock. I would expect unemployment to go way down to the 4 percent range. I think there’s some risk that that process starts to get away from us, and we’re not normalizing at an appropriate pace.
You can appreciate that having been seven years in the woods here that it’s hard to think about the economy doing well. But if you just look at macroeconomic history, this looks like we’re poised to be in a pretty good situation unless something major happens in the years ahead.
WP: When did you begin to feel reasonably confident that inflation would move back to target in the medium term? What was the turning point for you?
Bullard: You know that in 2010, I was a big advocate for QE2. I was one of the people that sort of triggered that process. If you look at 2010 and you look at all the inflation numbers at that time, it wasn’t just one or two of them -- they were all low. They were all down year-over-year, and they were all headed lower. And inflation expectations were also headed lower.
And I remember in 2010 all the complacency around this. But it wasn’t one measure of inflation, it was the whole picture. Then we adopted QE2, and inflation turned around and came back up to target by January 2012.
I thought QE2 worked beautifully. I thought we were done at that point. But since then, inflation’s been drifting down, and now, of course, headline inflation is quite low. But you’ve had this big oil shock in fall of 2014 that’s feeding into these numbers.
One of the things that has convinced me today that we’re not in the 2010 situation is this: Let’s suppose oil prices just stabilize where they are. What will the headline inflation rate be in 2016? And the answer is 2 percent. If the oil market just settles down and nothing else happens and all other prices keep going up at the rate they have been going up, you’ll be right at target. That’s what’s given me confidence that we’re on the right track here.
WP: If you had a time machine and could go back to 2008, what do you feel the Fed could’ve done differently to ensure a faster recovery?
The part of the crisis that’s not discussed enough is that the run-up to the crisis pre-August 2007. It’s really 2004-2007, which was the normalization period for rates, that you had to be much more vigilant than we were and much more cognizant of the risks. By the time you get to August 2007, the crisis was on. No matter how much thinking you did at that point or how much policy you did at that point, you were going to be in a crisis.
Now, I was on the [Fed] staff at the time, so I was on the bandwagon. I was drinking the Kool-Aid about the stories we were telling about the housing bubble. I was burned on that, and that has affected me in terms of how we should think about this normalization cycle.