St. Louis Federal Reserve Bank President James Bullard Wednesday said that while the Fed’s quantitative forward guidance served its purpose, the central bank may have to shift to a more traditional, qualitative approach to determining rate policy going forward.
“I think the thresholds have been very useful, and they have served their purpose,” Bullard said in a panel discussion at the European American Chamber of Commerce economic outlook event.
“They did their job in the sense that they tamped down (talk of raising rates) and gave the clear message that the committee was going to be very patient, and we’re going to wait for the economy to improve a lot before we came off the zero lower bound.”
The Fed’s policymaking Federal Open Market Committee decided at its December meeting to change the language in its forward guidance to say interest rates will stay low “well past” when unemployment reaches its 6.5% threshold if inflation was headed towards its 2% target.
In January, the unemployment rate reached 6.6%, just one percentage point away from the threshold for the Fed to consider raising rates.
“Now that we’re at lower unemployment rates, I think we’re going to have to go back to a more traditional policy … where we make more qualitative judgments about what we’re going to do with rates,” he said. “And that’s just because we are getting a lot closer to a more normal economy than we have been.”
Bullard, who voted on the FOMC last year, said a more qualitative approach to forward guidance “allows us not to be tied to a specific number” and encompass all labor market indicators “which we do anyway.”
He pointed out that the FOMC enhanced its forward guidance by adding the “well past” language but said he could see the FOMC removing the reference to the 6.5% unemployment rate all together.
“I just think it’s awkward to keep referring to 6.5%, after you go past 6.5%,” Bullard told reporters after the event.
“The most natural thing to do as you pass through this threshold is to go to qualitative approach.”
As for the other part of the Fed’s mandate, price stability, Bullard said inflation is a “head scratcher” for monetary policy makers. “I think inflation ticking up in 2014, we’ll be fine,” he said. “If we see further deterioration, we’ll have to start asking hard questions.”
Bullard said inflation has stabilized at the lower level, adding that expectations seem to be well anchored for now.
He also said the committee was prepared to deal with low inflation if it does not move back towards its 2% target, but said that’s not his baseline forecast for prices.
Bullard said the recent string of softer data hasn’t deterred his outlook for 3% GDP growth in 2014, saying he was “pretty suspicious” inclement winter weather negatively impacted recent data.
“I’m still optimistic about prospects for this year. I think we can get 3% growth this year or better,” Bullard said. “The faster growth in the second half of last year is setting up for a good year in 2014.”
But with the stronger economy, the Fed’s hard work is just getting started, he said. “The hard part in central banking is when you take the punch bowl away,” Bullard said.
He continued: “So far, we haven’t really been taking the punch bowl away very much, unless you count tapering. So I think our hard work is ahead of us… For central banking, it’s a much harder environment when you are trying to think about removing accommodation. So I think even though we received a lot of criticism over the past five years, I expect that to be as much or worse going forward.”
On the heels of Chair Janet Yellen’s testimony to Congress, Bullard was asked about political pressures on the central bank. He said the Fed could go to a single mandate, and “actual policy would not be that much different.”
He also said the audit the Fed bill proposed in Congress “is political interference in monetary policy making because what they’re saying is that they want to be able to audit the policy making process itself and I view that as a way to hassle the people that are trying to make really technocratic decisions about monetary policy.”
Asked about asset bubbles, Bullard said he didn’t see any large magnitude asset bubbles in the U.S. today, on the magnitude of the housing bubble or tech bubble, but added “as the economy continues to improve now going forward and we continue to have low rates, that that’s fertile ground for creation of asset bubbles in the future.”
Bullard said he agreed with Yellen in that “from the U.S. perspective, we don’t see developments in emerging markets as feeding back to the U.S. at least as of now.”
He added: “We’re cognizant the situation could change going forward, but at least for now we’re in good shape.”