Tagged: Bullard

What kind of bell is Bullard?

There was a time that James Bullard of the St Louis Fed was known as the bellwether of the Fed. Since then he’s been a bell of other varieties after some inconsistent comments, but his presentation earlier this year is important given its influence on the Fed’s hawks. As such, his pronouncements are still worth listening to.

Here’s a reminder of the key charts from that presentation, which showed the Fed is moving closer to its goals, while the stance of monetary policy is far from normal:
Bullard 1

So today he says that although he sticks with his view of a Q1 rate hike:
‘And so as of today I wouldn’t change the forecast. A lot of people in markets are saying, well, global growth is going to be much weaker and this is going to spill over to the U.S…And so if that kind of a scenario develops and then I would change my forecast,…But I don’t really see that happening as we sit here today. What I see is a fairly strong U.S. economy that will now be pushed ahead by some bullish factors, lower long-term rates and lower oil prices’

It may be worth delaying an end to QE:
‘Continue with QE at a very low level as we have it right now. And then assess our options going forward…it would keep the program alive. … If the economy is still is as robust as I’m describing it, then I think we could just end the program in December, but if the market is right and it’s portending something more serious for the U.S. economy then the committee would have an option of ramping up QE at that point.’

It’s the issue with inflation expectations that is worrying him
‘but I think the central bank, the policy committee should be cautious about the decline in inflation expectations, which is a serious matter.’ …’ you have to be credible on your inflation target’

He goes on to say it’s the deflationary impulse from the Eurozone and lower oil prices that are driving those expectations lower.
.. the global inflation factor is low certainly seems to be true based on the inflation numbers coming out of Europe. So and then we’re kind of partly tied to that global inflation factor. And that’s a downdraft on our inflation’

It certainly should ring some kind of bell when in July his presentation’s focus was on the labour market, but now his comments are all about inflation.

But really for the Fed – he reminds us again that it’s all about the economic data:
‘I think you should quit numbering the QEs. I’ve been an advocate of having an open-ended program. I do think QE is our most powerful tool when the policy rate is at zero. And I think it’s far more powerful than forward guidance for instance. … I think I’ve been for having an open-ended program that reacts to economic data. And so far we’ve been able to taper the program down on the face of really dramatically improving labor markets this year, but maybe this is a juncture where we’d want to invoke that clause about it being data dependent.’

Now, today’s US data was better than expected. It’s hard to argue with the lowest jobless claims number in 14 years. Payrolls expectations are already starting on a 300 handle (Soc Gen’s Brian Jones is going for 350k). The US bond market sold off today in a sensible fashion but after yesterday’s flash crash, fear stalks underwater positions. That’s not going away any time soon and will therefore force long term investors such as asset managers and central banks to consider just how safe a “safe haven” their US Treasuries really are. On top of that, we have the Fed in a pickle about how to solve lower inflation expectations but improving employment data. Volatility is here to stay.

 

Ahead of #J-Ho, A reminder of the argument of the #FOMC hawks

Yes, we are really calling it J-Ho. Jackson Hole just got Twittered.

Ahead of that, here’s a reminder of the charts from the presentation by Bullard on just how close the Fed is to achieving the goals of its dual mandate (first released 9th June, updated 17 July) http://bit.ly/1p0aybf:

1. The Fed is closer to its macroeconomic targets today than it has been for most of the time since 1960; meanwhile the massive and prolonged stimulus means the policy stance is still far away from being normalBullard 1

2. He explains that the ‘mismatch’ between these two lines is driven by the labour market, a topic we expect to be covered at length by Yellen at the symposium. His chart explaining that the labour market is “not fully recovered” actually looks pretty decent and shows the improvement in the past 5 years. The area that needs to catch up is the bottom left panel, the part-time workers and low job finding rate.
Bullard 2

For the hawks to win the day, they need to argue either that this area is also improving, or that it is a lagging indicator of labour market strength.

So when Yellen speaks at J-Ho, how much improvement will she admit that there is in the labour market? Fischer’s speech ten days ago suggests that the doves still feel the jury is out http://blondemoney.co.uk/2014/08/stanley-fischer-speaks/

After all, we know that the “optimal control” view of monetary policy is to let inflation overshoot so that you entrench economic growth. Will the FOMC’s hawks take a lesson from those on the MPC, and use the language of the doves to win over their colleagues? That is, can they convince the doves that hiking sooner means doing less later? And that the lag of monetary policy means Bullard’s ‘mismatch’ must be addressed now?

Carney looks prepared to move with the midpoint of his committee, but Yellen has been known to say that the Fed is not a democracy. Those going into this weekend’s meetings short of US fixed income might pay heed to the words of another female leader – ‘this lady’s not for turning’.

 

The more we hear, the less we know

Mark Carney’s first Treasury Select Committee hearing earlier this year was remarkable for one thing: his obsession with communication. The success of the Bank of Canada’s so-called ‘contingent commitment’ was taken up with aplomb by the Fed, and now Carney brings it to the BoE with ‘forward guidance’. Even the ECB want to join the party.

They should be wary. Last night’s Fed statement has been pored over for exactly what the inflation/unemployment targets mean – does disinflation dominate? How more dovish is “modest” than “moderate”? We might know that Esther George is less dovish than James Bullard, but what does dovish even mean these days? Taper later:? Taper then reverse? Butcher, baker, candlestick maker? We’ve gone from gnomic Greenspan to verbal diarrhoea Bernanke, and are none the wiser.

The trouble in this information age is that the more we read, the more confused we become. Instead of stepping back and trusting our judgement, we dive in further in a desperate bid to find the silver bullet of a detail.

It’s time to stop listening to the central bankers, and take a view on the data. I know, it’s tough to believe the world might be recovering. But it is. Sure, it’s not going in a straight line, but even European growth is picking up (check out those PMIs). As Frankie says, Relax.