By STEVEN NALLEY
Nuances are important to Federal Reserve Bank of St. Louis President James Bullard.
Those who do not necessarily follow American finance in-depth might be operating under the impression that U.S. monetary policy is largely the same in 2013 as it was in 2012, Bullard said. Actually, he said, subtle changes have made U.S. monetary policy more aggressive than it was even six or nine months ago.
“The notion is that these changes have really added to an already easy U.S. monetary policy and has put the pedal to the metal,” Bullard said. “It’s not the simplest thing in the world, but I do think it’s important, and ... I’m going to argue that (U.S. monetary policy) is easier than last year at this time.”
Bullard spoke about monetary policy changes that he believes will help secure America’s economic future during a special banking forum Mississippi State University’s Department of Finance and Economics hosted Thursday at the Hunter Henry Center.
Sharon Oswald, MSU College of Business dean, said Bullard also visited business students earlier in the day, giving them a rare opportunity to meet one of America’s top financial executives and gain from his perspective.
“This gave students the opportunity to learn about monetary policy from one of the people who sets it,” Oswald said. “We’re very lucky to host him and for him to be able to speak to our students.”
Bullard’s lecture focused on changes to two key facets of U.S. monetary policy that have changed recently. First, he discussed the nominal interest rate policy, which is the baseline upon which other American banks build their interest rates.
Previously, the Federal Open Market Committee (FOMC) had pledged to keep the nominal interest rate near zero until 2015, Bullard said. Since near-zero rates are associated with slow economic growth, he said, this policy has caused pessimism among business leaders
“That could be interpreted as saying the economy is going to be terrible until 2015,” Bullard said. “We didn’t want to do that; that’s counterproductive.”
So, in December, the FOMC instead adopted thresholds for raising the nominal interest rate: an inflation rate of 2.5 percent and an unemployment rate of 6.5 percent. He said unemployment has declined gradually despite the slow growth of the economy, and he is optimistic that unemployment will continue to drop through 2013.
“We could be in the low sevens by the end of this year. Then, we’d be in striking distance of the 6.5 percent,” Bullard said. “Thresholds are not a panacea. The U.S. economy is a $15-16 trillion outfit. It’s not such that you can look at two numbers and get a complete characterization.”
Second, Bullard discussed the balance sheet policy, which determines how the U.S. Federal Reserve uses quantitative easing (QE) to pump funds into the economy and simulate it. Previously, he said, the federal QE2 policy used a strategy known as “Operation Twist,” buying and selling different maturity investments. He said the new QE3 policy adopted in Sept. 2013 has central banks buying assets outright at an aggressive pace of more than $1 trillion per year.
However, Bullard said, there are concerns that QE policies cannot continue forever, and the size of the QE balance sheet can make ending any given QE program difficult. As such, he said he recommends gradually lowering the intensity of QE as the economy gradually recovers.
“The (FOMC) has said it seeks substantial improvement in labor markets as a condition for ending the current asset purchase program,” Bullard said. “Substantial labor market improvement does not arrive suddenly.”