“No way out”: Commit or die!

St Louis Fed president Bullard is “worried”:

Recent declines in inflation expectations, as measured in government bond markets, are worrisome, James Bullard, president of the Federal Reserve Bank of St. Louis said in an interview with The Wall Street Journal.

But not willing to commit:

Mr. Bullard has pushed internally for the Fed to use asset purchase programs as its main tool for providing an additional boost to the economy if it is needed. Other Fed officials favor different approaches. For instance, Chicago Fed President Charles Evans wants the Fed to promise to keep short-term interest rates near zero until unemployment drops below 7.5% or unless inflation rises to near 3%. Mr. Bullard said he isn’t not for these kinds of commitments.

And Evan´s suggested commitment is far from being the most effective one.


Josh Hendrikson has a very nice post on the symbiotic relation between policy and expectations, in particular that it´s not about the “arithmetic”, or size, of the stimulus (fiscal or monetary), but about the degree of commitment of the policy maker with its stated target, which ultimately will shape expectations.

The Federal Reserve’s focus on the size of its asset purchases represents a grave mistake. There is no model that tells us the precise size increase in the central bank balance sheet will get us to a desired level of nominal income. Those who continue to claim that the magnitude of monetary and fiscal policy haven’t been large enough fail to recognize this point. This is the lesson of the Lucas Critique. Expectations matter.

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