Fed Small QE Tapering in Ocotber is Possible
Interest-Rates / Quantitative Easing Sep 21, 2013 - 11:04 AM GMTBy: Bloomberg
Bloomberg Television's Sara Eisen and Tom Keene sat down with Federal Reserve Bank of St. Louis President/CEO, James Bullard to discuss the Fed's decision not to taper and said that a 'small taper' in October is possible, that he doesn't want to see brinkmanship on debt, and insisted that the Fed still absolutely targets dual mandate.
Full Transcript:
07:02
SARA EISEN, BLOOMBERG NEWS: Well our top story of the week really after the surprise from the Federal Reserve this week, we one of the decision makers in the Federal Open Market Committee himself with us for the entire hour, James Bullard, the twelfth president of the Federal Reserve Bank of St. Louis, good to see you, Jim.
JAMES BULLARD, PRESIDENT, FEDERAL RESERVE BANK OF ST. LOUIS: Great to be here. Thanks for having me.
EISEN: So markets this week were set up for the start of tapering, or starting to rein in some of the quantitative easing. Does the Federal Reserve have a messaging problem?
BULLARD: I don't think so. I think it was a good decision. We said that this was data dependent. It is data dependent and so I think that's one message of this that comes out of this. I think a lot of people in markets had some kind of idea that this was some kind of straight line down to zero. And that is not the case. And the chairman has emphasized that over and over. So I'm a little dismayed at those in markets that are saying that they're surprised by this.
EISEN: Well if -
BULLARD: When we came in, when we came into this June decision we said that we were going to - we told a story and the story was that the economy was going to improve in the second half of the year. And if we saw that improvement we would taper, but what actually happened was we got some weaker data and then that put the committee in a position where we can delay.
EISEN: Well speak more to the data. If you're data dependent, what sort of picture has the data been painting for this economy? How fragile is the recovery?
BULLARD: I don't think it's that fragile, but if you look at tracking forecasts for GDP, they're below two percent right now. For myself I was expecting -
TOM KEENE, BLOOMBERG NEWS: Right.
BULLARD: - the second half to be up around three percent or something like that. So it gives you a little bit of pause. Also the inflation numbers have been low, something I've been emphasizing.
KEENE: Let's set up the hour for you, folks. This is wonderful, an entire hour exclusively with James Bullard of the St. Louis Fed. Talk about the Fed here. We'll talk about St. Louis and then Michael McKee with an extended interview later on. I want to talk to you about Indiana University.
BULLARD: Excellent.
KEENE: You took your PhD there -
BULLARD: Yes.
KEENE: - a million years ago. You've been at the St. Louis Fed 23 years. Back then the Fed communicated with incense, and myrrh and semaphore flags. Is there too much transparency now? Do you sit there in St. Louis and go, would everyone shut up?
BULLARD: No. I think the transparency cat is out of the bag and we're not going to go back to a situation where have the kind of smoke signals that sent in the '80s or '90s. I think that was probably not a good way to do business, even though that's the way it was done at that time.
MICHAEL MCKEE, BLOOMBERG NEWS: You talked about the Fed chairman speaking over and over again about if the data - the Fed chairman didn't speak after mid July. The vice chairman didn't speak at all since the tapering talk began. So can you really say that markets got this wrong? Do you have a communications problem? Or do they have a listening problem?
BULLARD: No. I think there was Fed communication and the committee does get out and try to communicate as best we can. And I think one of the things that happened between the July meeting and this meeting was weaker data came in. And markets did ratchet back their expectations for tapering. We started talking about a smaller taper. And so one other challenge I would have for all of you is how much difference is there between zero and $10 billion.
KEENE: Then why didn't they do - that's the key question.
MCKEE: Well then no -
KEENE: Why didn't they do a little bit instead of this zero sum game?
BULLARD: I think that was a borderline decision and the committee came down on the side of let's why don't we just wait. And I would say and for me anyway inflation is low. We can afford to be patient. We don't have to hustle on it.
MCKEE: Was this one of the most uncertain Fed meetings as you sat around the table?
KEENE: Good question, yes.
BULLARD: Yes, because the data didn't come in the way we were hoping to validate what we said in June.
EISEN: But if you look at some of the weak points of the economy right now, inequality, jobs, demand, is this really something that QE is effective in addressing?
BULLARD: I'll tell you one thing. If you look at what happened after the June meeting and you look at what happened after this meeting, it should lay to rest the notion that QE is somehow ineffective, or doesn't have any impact or something like that. That is just going out the window. And those that are saying that are going to have to re-scramble to recalibrate their model.
KEENE: Right. President Bullard, this is critical. Mike, help me here because there's a sequence here. You have a meeting and then the minutes come out how many weeks on, Mike?
MCKEE: Three weeks.
KEENE: Three weeks on. You've just spoken about this meeting of a few days ago. You stated to Mike McKee that there was a real discussion involved. Without jeopardizing the release of the minutes, what was the distinctive tension in the room at the Eccles Building?
BULLARD: Oh I don't think it's any secret or anything. It's the same thing that was discussed in financial markets where the data had come in weaker. The employment report was you had this decrease in unemployment, but also a decrease in labor force participation. What should we make of that? And you really got this just general story of mixed data coming into this meeting. I think based on what we said in June you would have hoped that we'd have pretty strong data coming to this meeting that would rationalize the pullback.
KEENE: Michael McKee?
MCKEE: The statement sites financial conditions. So was it your fault? Did the Fed do it by starting to talk about tapering? And how much of it was (inaudible)?
BULLARD: Okay. Rates went up a lot over the summer. That's definitely true. And I think for many on the committee that was a surprise. That was not a surprise for me because I've said that the flow rate of QE really does matter a lot. And so when we threatened to pull that back markets naturally bid up the yields on the ten year. And I think the chairman was right. That was a concern for the committee.
KEENE: And this sets up the perfect polarity between the Fed and the Bank of England, this idea of the flow rate versus an analysis of the stock. What's - and when you hear this conversation with our St. Louis president, how do you observe it to the prism of the Bank of England?
ANNA EDWARDS, BLOOMBERG NEWS: Well we did that interesting comparison about where interest rates went on the ten-year gilt in the U.K. after they ended quantitative easing there, comparing that to people's expectations of where interest rates are going to go when tapering starts here in the U.S. There will be differences, won't there though, James, because we had - by the time the QE was ended in the U.K. the economy wasn't in a very strong place. Things looked stronger here. So there were crucial timing differences in the experience.
BULLARD: Yes. And it's a big factor for this program here is that is open ended QE. And that's something I advocated for a long time. And I think it - that's one of the reasons this has a big impact on the economy is because even though you're talking about a small amount the markets are going to trace out a whole future path for possible purchases.
EISEN: And very quickly, Jim, as we look at the surprise in the markets, there are some critics this week that are saying the Fed has a credibility issue. What do you say to that in communicating its message on policy?
BULLARD: No. I think we do as good a job as we can do on communication, but there is a lot of uncertainty when we're tracking the economy, as you guys know. And data comes in in different ways, and we have to assess that data and make a decision.
KEENE: Two days after a giant Fed meeting, a shocking Fed meeting, we bring you James Bullard for the entire hour from St. Louis.
07:09
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07:11
KEENE: This matters now to our guest, James Bullard, the president of the St. Louis Fed. This is the Fed district of, well, it's the Fed district of the first place St. Louis Cardinals. Dr. Bullard in economics suggests inflation of a lack thereof, should have the full attention of all global central banks, Dr. Bullard, questions the Fed's fierce focus on jobs. Is it a dual mandate Fed right now? Are they really looking at jobs, and are you, the presidents, the governors, the chairman, do you also care about inflation right now?
BULLARD: Absolutely. It is a dual mandate and I have been a little concerned in the last couple years that we've shifted so much attention to jobs. And of course we are concerned about high unemployment, but I don't want to lose the focus on inflation. Inflation has been running low in the U.S. And I think that's something that should concern the committee. Our current forecasts are that it will come back to target, but I'd like to see that happen.
KEENE: Well there has to be an action rather than a forecast. Madam Lagarde at the IMF, Oliver Blanchard at the IMF and others talk about a need to reflate. Do we need more, to be more aggressive about a higher inflation to regenerate an animal spirit that will create investment and new jobs?
BULLARD: What I like to talk about is that if we set an inflation target of two percent we should hit the two percent inflation target. We should have credibility that we're going to hit that target. So we're moving accommodation when inflation is below target, and maybe threatening to even go lower is a concern to me. People like Olivier Blanchard have advocated choosing some higher inflation target.
KEENE: Back to this program.
BULLARD: I don't think we would get anything out of that, but I do think that we should defend our inflation target from the low side.
KEENE: There are words that mere mortals speak of that economists speak of differently. I think of the word distinction and others, but one of them is credibility.
BULLARD: Yes.
KEENE: Define for our audience what credibility means to central bankers.
BULLARD: Credibility means ideally committing to a rule that tells the financial markets how we react to developments in the economy and how we'll adjust policy in reaction to developments in the economy. So the Taylor Rule is a great example of you can have a credible commitment to the rule. That doesn't mean people know exactly where interest rates would go in the future, but they do know how the central bank is going to react to developments in the economy. We don't really have that as good right now with our QE program, just does not have as much experience with the QE program as we do with a normal interest rate target.
KEENE: And James Bullard with us. And we will continue two days after an historic Fed meeting.
07:14
(BREAK)
07:18
KEENE: James Bullard here now, president of the St. Louis Fed. Those Pirates have been pesky, but it's fun.
BULLARD: But the Cards are looking good right now, looking very good.
KEENE: Do you go to the games?
BULLARD: I have been a couple games this year.
KEENE: Is there a Federal Reserve box, or do you have to -
BULLARD: Oh no. We don't do that. We -
KEENE: Budweiser takes you and you have to pay for your own seat.
BULLARD: Yes.
KEENE: Yes?
BULLARD: Pay for my own seat.
KEENE: But they give you free Budweiser so it's worth it, right?
BULLARD: No. They don't do that either.
KEENE: Okay.
07:19
(BREAK)
07:30
EISEN: Jim Bullard, our guest, of course the president of the St. Louis Federal Reserve Bank. Jim, this idea that there's a manufacturing renaissance that we can count on manufacturing for more growth and that this is a changing story, do you buy it?
BULLARD: There are instances of reassuring in manufacturing in the eighth district, which is my district around seven states around St. Louis. And so I do pay some attention to it. And I give some credence to this. I think you can cite a couple macroeconomic factors. Oil prices have tripled over the last decade. Transportation costs are higher and wages are rising in Asia. And so that's - those kind of factors together are making some business calculations decide to - business calculators decide to bring the manufacturing (inaudible), -
EISEN: Well how much more competitive -
BULLARD: - especially specialized manufacturing.
EISEN: How much more competitive are we then in our nation's factories compared to the place like China?
BULLARD: Well I don't know if I can put a number on it, but we're more competitive than we were a decade ago. That's for sure.
KEENE: The first question the chairman had in his news conference was on structural and cyclical unemployment. You've been very, very good on this. Which side do you stand on? What is the Bullard nuance from the chairman? Is that job pain in America, that anxiety, is it a permanent structural change? Or with a better economy can we feel better about American jobs?
BULLARD: One of the biggest issues here is labor force participation. And I think for those that look at this you have to realize that labor force participation has been dropping in the United States, not since 2008, not since 2007, but since 2000. So it's been dropping for more than a decade. A lot of that is accounted for by demographic factors. And I think that's something to keep in mind, letting people keep pointing to lower labor force participation, but a huge chunk of that is really -
KEENE: You're not as really on that.
BULLARD: Yes. It is really structural.
EISEN: And another Fed worry besides the labor market is obviously Congress. So I wanted to bring it up during the health care discussion, but clearly Ben Bernanke signals there's a concern about Congress here. How great of concern is that for you?
BULLARD: Brinksmanship in Washington was very damaging to the U.S. economy in 2011 on this issue. We had a downgrade of U.S. debt that was a needless downgrade in my view. It could have all self-inflicted by our own political process. I don't want to see that happen again.
KEENE: Did that conversation affect this shocking announcement two days ago?
BULLARD: Well it's in our statement that - and in the press -
KEENE: Yes. But I want to know back story. I want to know what happens in the room. Forget about the statement. Was it a source -
BULLARD: Well I can't report on what directly was said in the meeting, but the committee did come to the decision to cite fiscal factors.
EISEN: Well how hard could it hit our economy?
BULLARD: Well it was a big factor in 2011 I think. There were several things going on and at that juncture.
KEENE: Right.
BULLARD: But it was a big factor there.
07:33
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07:36
KEENE: Jim Bullard, they are in your St. Louis district. They are everywhere. It's a cliche. Tell us about the cliche. Is the distribution of packages a really good barometer of the American economy?
BULLARD: It's an excellent barometer. I talked to the team that's over in the Louisville area, which is in my district. Their - UPS' Worldport facility is just outside of Louisville there and I've actually visited that. Of course I also have FedEx in my district, so I talked to both teams. And excellent - both give excellent reports, a good barometer of what's going on in the economy.
KEENE: To Sara's wonderful question about investment, why isn't there not investment? This has been a disappointment. And Macroeconomic Advisers of St. Louis says a 1.7 percent third quarter. Why aren't we investing?
BULLARD: Yes. I don't know. For companies like FedEx and UPS I think they've got - they're big global companies and there are issues in the package or delivery business about how they're going to cope going forward. And I think they've both got very good strategies about how they're going to do that, but so I'm not sure you can get the CapEx and just out of one industry. Sometimes you get mislead by something by just looking at one industry that has special factors.
KEENE: Very good, Jim Bullard with us of the St. Louis Federal Reserve, this important Fed meeting of a few days ago.
07:38
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07:42
KEENE: Jim Bullard is with us with the St. Louis Fed, the Oracle of Omaha. Is that in your district?
BULLARD: And it is not. It is not, yes.
KEENE: The districts, folks, built in 1912, I think Rhode Island is in Jim Bullard's district.
EISEN: You're got Arkansas, right? You've got all of Arkansas.
BULLARD: All of Arkansas, Wal-Mart is with us, yes.
KEENE: Seven states, right, seven states?
BULLARD: Yes, yes.
KEENE: There are Wal-Marts in your district, a perfect example.
BULLARD: Yes, yes.
KEENE: But he is from Omaha and he sort of transcends the plutocracy of the haves with Main Street America. Are we getting any closer between the bankers of New York and Main Street America from your view from St. Louis?
BULLARD: No. Main Street is still very upset by the events of 2008 and 2009. And they still feel like there was a big bailout of fat cats like -
KEENE: What is your advice to fat cats in New York? What can they do in 10019?
BULLARD: They should get out, and see the rest of the country and talk to people in the rest of the country. That's well actually one of the reasons Warren Buffett I think has this public persona is as good as it is, is partly because he's based in Omaha.
BETTY LIU, BLOOMBERG NEWS: Right. He's (inaudible).
BULLARD: The truth is he's jetting all around the world, but he's based in Omaha. So I think it makes a big difference.
EISEN: All right. And, Betty, it's CFO week here on Bloomberg Television. We just spoke to the CFO of UPS.
LIU: I saw that as well. That's right. I have the CFO of Discovery Network, home of the Oprah Winfrey Channel as well, and Andy Warren. He came on and talked a little bit also about Fed policy, by the way, and what easy money means for his company and easy borrowing.
EISEN: And you don't have Oprah Winfrey in your district either. There's a Chicago Fed.
BULLARD: That's Chicago.
KEENE: And a softball game between St. Louis and Chicago Fed?
BULLARD: No. We play baseball against the Cubs and generally do quite well.
07:44
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07:49
KEENE: James Bullard is from the Federal Reserve Bank of St. Louis. He is with our chief economic correspondent, Michael McKee. Mike?
MCKEE: Thanks, Tom. Well let's get to this, Jim. You had to know going into the meeting what market expectations were. Why were market expectations so wrong?
BULLARD: I think they were a little more diffuse than they're being portrayed in the aftermath here. It was like it's being portrayed as if it was 100 percent. I don't really think it was. It was more like 60/40, at least some of the surveys that I saw. And so I'm not - and there were people that were saying no taper at this meeting. So I'm not quite so sure that it was as big a shock as -
MCKEE: But you did and figure when you were talking around the table that you would surprise people.
BULLARD: My personal assumption was that it would be somewhat surprising to markets, the decision that we made, although I would say that a $10 billion taper versus zero is not really a big thing. So expectations had already been ratcheted back as the data came in through August and the first part of September. Markets and maybe Fed policymakers too had ratcheted their expectations back. That's how we got to the talk about a small taper as opposed to larger numbers that were being discussed earlier in the summer.
MCKEE: Well you've been using forward guidance as an important tool for policy, but that only works if investors believe what the Fed says. And a lot of them say they don't now. Did you hurt yourself with that surprise?
BULLARD: Well where I dissented with the committee was at the June meeting. The June meeting was where we laid out this road map. And I thought that that was premature at that point and that we were going to have to get good data in order to verify that road map. That isn't what happened and so we ended up with this delay at this September meeting. S
o I think the kind of thing that we did in June I would still say is maybe not the right way to approach this. We were trying to lay out an entire program that would stretch out until next summer about how we were going to reduce the pace of purchases. I prefer to keep it more emphasis on the idea that this is data dependent, we're going to see how the economy evolves and we're going to assess the situation. And we'll make decisions from there. That's much closer actually to normal monetary policy. And that's how I'd like to see it run.
MCKEE: Well in June Ben Bernanke said if the data, and he did say if, it came as expected then you would start to taper by the end of the year and finish about the time that unemployment hit seven percent. Are those criterion off the table now?
BULLARD: The seven percent number has never been enshrined in the statement. The committee has never actually committed to that. The chairman put that out as a guidepost, but I would say it is a soft guidepost. He's indicated as much at the press conference just the other day.
And I would say one other thing that the chairman did a good job of, he said that there was never any promise about a move, particular action at a particular meeting. He said maybe later this year if the data come in as expected.
MCKEE: Well is it going to be later this year? Or do we look to 2014 now?
BULLARD: I would say October is a live meeting. The chairman put on the table that if we want to we can have a press conference at that meeting. So I do think it's a live meeting. We've also got -
MCKEE: Data wise is it?
BULLARD: What?
MCKEE: Data wise is it possible this year?
BULLARD: Well this was a close decision here in September. So it's possible you get some data that sort of change the complexion of outlook and make the committee be comfortable with a small taper in October. It's possible. I'm not saying it's going to happen, but it is possible. And then you have of course other meetings after that.
MCKEE: How much did Janet Yellen drive the decision around the table?
BULLARD: Well she's an important participant and player on the committee, but everyone makes their own contributions and tries to get their own views on the table.
MCKEE: Is it going to be a different Fed if she's in charge?
BULLARD: Well I wouldn't want to pin her down on what she's going to do. I think we got to let the White House make a decision here on what they want to do in conjunction with the Senate. And then if she does get the job we've got to let her map out her strategy I think.
MCKEE: Well the market interpretation is that she's going to get the job. She is in favor of doing as much as possible to reduce unemployment. So now you've got a situation where we're looking at QE really to infinity that it stretches through next year because you still need to get the economy going. It's not - the data aren't telling you you can stop.
BULLARD: Yes again I wouldn't want to speculate on what her strategies might be. And if she does get nominated of course there will be lots of chances for her to answer all kinds of questions about what her strategies would be. The committee does have a strategy. She's been on board with that, as have I and most of the other committee members. I don't think that's going to change a lot going forward. There will be a lot of continuity I think. And I wouldn't see big changes ahead.
MCKEE: Now you said earlier that some members of the Fed were surprised by the market reaction after Ben Bernanke started talking tapering. You were not. Really? They didn't expect that if you start withdrawing stimulus from the economy or provide a little bit less that market rates wouldn't rise?
BULLARD: I think there was a sense that if we provided some clarity at this June meeting, now we're talking June, if we provided some clarity or a road map about the way we might withdraw from QE that this would actually be reassuring to markets and possibly reduce some of the uncertainty in markets. And that isn't what happened. Instead it was viewed as a tightening action and that's something that I'm an advocate of. I think if you're going to say it's accommodative when you're going up that it's going to be removing accommodation when you're going down. And yields went up. So that's exactly what happened.
MCKEE: Jim Bullard, St. Louis Fed president, thank you very much for coming in today. Go Cardinals.
BULLARD: All right. And thanks, Mike, appreciate it.
07:55
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07:57
EISEN: The question that is going to drive everything is going to be who is the next Fed chairman. How much more difficult does that make your job that we don't have an answer to that question right now?
BULLARD: It's a big committee. There's a lot of talent around the table. I really have a lot of respect for everybody's views. We think a lot about these issues. We have a great staff. So I really think there's a lot of continuity in monetary policy making because of that. Of course it matters who the chairman is, but I still think there's a lot of continuity.
EISEN: All right, Jim Bullard, great having you on. Thank you so much for spending the hour with us, the St. Louis Fed president.
07:57
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