James Bullard makes a good point. But the reasoning is faulty

The WSJ reported on Bullard´s speech (my bolds):

“The 2014 language in effect names a date far in the future at which macroeconomic conditions are still expected to be exceptionally poor,” Federal Reserve Bank of St. Louis President James Bullard said in a speech in St. Louis. “This is an unwarranted pessimistic signal for the [Federal Open Market Committee] to send,” given that the economy is recovering and forecasters can’t really tell what will happen that far down the road.

“We don’t even really know six months in the future” what will happen with the economy, which means when it comes to the current rate pledge, “we don’t have much basis for making that announcement”, Bullard said.

In comments to reporters after his speech, Bullard suggested the entire regime of extended forecasts the Fed now presents to markets should be viewed cautiously, saying the uncertainty that surrounds these projections is large enough to make the forecasts of “limited value.” He said it is only the medium- and long-run inflation numbers that have real value, as they are something the Fed should presumably be able to control.

Bullard´s right in saying that that´s a pessimistic signal for the Fed to send. In my view, what the Fed is saying is “that it cannot do anything about it, so it will try to be as ‘easy’ as possible to diminish suffering”. But Bullard thinks that´s unwarranted because “the economy is recovering”.

If by “recovery” one means the economy is growing, that´s true. But recovery must mean something else not related exclusively to a rate of growth, no matter how small. “Recovery” must be related to a “level” concept and what we have at the moment doesn´t qualify as recovery because the economy is not climbing back to a point close to where it should be if it hadn´t plunged. It´s just content with the level it came down to. I don´t suppose the unemployed, including those discouraged from looking for work, would accept that.

In his presentation Bullard mentions again the fact that the economy is not that far from “potential”. If that´s true, there´s really nothing much the Fed can do in the way of “stimulus” before igniting inflation again. As Bullard says: “Inflation has increased during the last 18 months, favoring the interpretation that business cycle adjustment is largely complete”.

So basically we have the following situation: Some think things are bad and will continue to be so for a relatively long time, but don´t think they have the means or power to change that “fate”. Others, on the other hand, think things are improving, that the economy is close to its “potential” and that the Fed should stand pat and be prepared to act (raise rates) as soon as inflation shows signs of picking up.

 

One thought on “James Bullard makes a good point. But the reasoning is faulty

  1. Pingback: St Louis Fed President James Bullard makes a good point. But the reasoning is faulty « Economics Info

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