Fed's Bullard: "Material reassessment" is "big tent language"

By Howard Schneider
FILE PHOTO: St. Louis Federal Reserve Bank President James Bullard speaks at a public lecture in Singapore

By Howard Schneider

WASHINGTON (Reuters) - St. Louis Federal Reserve President James Bullard expounded on what might comprise a "material reassessment" of the economic outlook, the Treasury yield curve, the central bank's framework review and more in a Reuters interview.

Following are excerpts from the Jan. 14 discussion with him at the St. Louis Fed:


Q - Interest rates are now on hold until what Chairman Jerome Powell called a "material reassessment" of the economic outlook. Is the phrase too vague or will it mean roughly the same thing to everyone?

A - It is big tent language ... I do think it matters that it is not in the statement. The committee did not have to come to a decision to put it in. That probably does mean that different people will have different interpretations.


Q - What does it mean to you?

A - One unifying theme is that our preferred measure of inflation ... is only 1.6 percent. That has got to improve.


Q - And if not?

A - It is wait and see. We made a large (interest rate) move in 2019 ... I think we will see how much impact we have in the first half of 2020 and probably all the way through 2020 and then we will see where we are.


Q - What about the bond yield curve? That has been a concern of yours. It is positive but very flat.

A - If you look at the 90s after the Fed eased policy somewhat the 10 year - 2 year (Treasury bond rate spread) fluctuated between 100 basis points and 0. Fifty would be a good goal. We are at 24. Not quite as steep as you would otherwise think. But we are going in the right direction.


Q - But you don’t want to act further to get more slope now?

A - No. I am happy to have upward sloping.


Q - Also, the 5-year, 5-year forward expected inflation rate has improved, which was another worry of yours.

A - I think we demonstrated some agility to markets during 2019 that we were not going to be rigid ... and I think that is paying some dividends in the form of long-term inflation expectations that are somewhat closer to our inflation target ... It is still below two. It should be above 2…You could argue that inflation perks up this year and markets will price in a little bit higher inflation expectation.


Q - Why this year?

A - The fact that we eased substantially in 2019 ... bodes reasonably well for the 2020 economy. It might grow faster than 2019 and it is that kind of dynamic that would lead us back to a better expected inflation environment.


Q - Seems that if there was any residual doubt at the Fed about lower equilibrium interest rates it has been resolved and the last year represented an acceptance of that new normal.

A - It was a year where we really came to grips with the idea that we were not going to go to 1990s or 2000s level interest rates in the United States ... Not only did we quit trying to go to those higher levels but we turned around and went the other way.


Q - Are there financial stability reasons to consider raising rates back at some point?

A - I just don’t see anything right now that is so compelling to say we are in a bubble environment and we have to change monetary policy because of that ... But we are certainly alert.


Q - The chair has also set “persistent” inflation as a benchmark, at least for himself, for raising rates. You agree?

A - I would like to see us able to stake a claim that we are definitely going to hit the inflation target or exceed the inflation target over a forecast horizon since we have missed on the low side for such a long time ... Ideally you could have a couple of years at higher inflation relative to target and that would average out for the couple years we have been below and that would be a good outcome.


Q - In terms of maintaining an inflation “anchor,” is there a point above 2% where you’d start to worry inflation might no longer be stable?

A - The idea of the last ten years is that we have been putting too much weight on that. We want inflation low and stable. But not so low and stable that we get into the Japanese situation or the European situation. You have to take some risk with some upside.


Q - In the ongoing review of different ways to manage inflation, it seems the commentary now coming from the Fed is that none of the more complex approaches, involving promises to fully offset past lower inflation with higher future inflation, are going to be adopted.

A - Well I have been concerned that the expectation has been that Moses is going to come down with the commandments chiseled in stone and I don't think that is going to happen ... We could make some changes ... You could give some hints that we are going to press harder in this direction or that direction. But that is probably the maximum you can expect out of this process... It is important we are doing it. It has some potential to improve things. But it is going to be on the margin.


Q - What do you want to see out of it?

A - I would like to see strengthening of the "symmetry" aspect ... What you'd like to be able to say is that going forward we expect that inflation will be above or below the inflation target with equal probability ... Actionable and more forward looking would be good."


Q - When this all got started was it clear that the ability of today's Fed to in effect speak for future policymakers would be such a sticking point?

A - It is a very tangible and real issue. You might try to say that we will do certain things and then no one believes you and therefore nothing happens at all and the whole policy falls flat ... These type of expectations plays can fall short and it is very concerning that you not lose credibility through a process like this.


(Reporting by Howard Schneider; Editing by Dan Burns)