Today, Bullard was the lunch attraction at the SOMC!

That´s the “Shadow Open Market Committee”. The title of his talk: Three Challenges to Central Bank Orthodoxy. His opening:

The current monetary policy debate in the U.S. is at a crossroads. Since 2007-2009, the Federal Open Market Committee (FOMC) has pursued a very aggressive monetary policy strategy. This strategy has been associated with a significantly improved labor market, moderate growth, and inflation relatively close to target, net of a large oil price shock. A key question now is how to think about monetary policy going forward.

And concludes:

In this address, I have outlined an interpretation of current events in U.S. monetary policy that I called the orthodox view. This view stresses the currently stark difference between FOMC objectives, which are arguably nearly attained, and FOMC policy tools, which remain on emergency settings. A simple and prudent approach to current policy would be to begin normalizing the policy settings in an effort to extend the length of the expansion and to avoid taking unnecessary risks associated with exceptionally low rates and a large Fed balance sheet. This would be done with the understanding that policy would remain extremely accommodative for several years, even as normalization proceeds, and that this accommodation would help to mitigate remaining risks to the economy during the transition.

What Bullard and many others call “very aggressive” monetary policy just reflects the mistaken view that monetary policy (MP) is synonymous with interest rate policy (IRP). The same large group also likes to appeal to unspecified “risks” that supposedly flow from  “excessively” low rates so that “prudent” policy would be to begin to “normalize policy” (another reference to MP=IRP). As Jeremy Stein famously said halfway through his short tenure at the Board, “interest rates get into all of the cracks”. Anyway, the FOMC objectives are nearly attained!

The SOMC speaks!

The Shadow Open Market Committee met and said:

The economy is growing, labor markets have improved dramatically, and inflation is forecast to return to two percent over the intermediate term. However, the Fed still expresses extreme caution about normalizing monetary policy, citing myriad concerns, ranging from sluggish wage growth and low inflation to foreign economic and political risks, which might delay the date at which interest rates finally lift off their zero lower bound. This creates the potential for an erosion of the FOMC’s credibility and suggests the Fed lacks a clear strategy for getting monetary policy back on track.

Departing from the consensus that prevailed throughout the Volcker and Greenspan Fed Chairmanships, which held that a commitment to low and stable inflation is the best contribution that monetary policy can make to sustained economic growth, FOMC officials in recent years have relied on a shifting array of ad hoc labor market indicators to guide their policy actions. Not surprisingly, these labor market measures have proven unreliable and unpredictable, and have led the Fed through a series of awkward policy target changes that have added uncertainty and reduced the credibility of FOMC members’ interest rate forecasts.


Within such a rules-based system, several very specific points of guidance for monetary policymakers become clear. First, historical experience tells us that whenever interest rates are too low for too long, financial markets become distorted and inflation begins to rise. After an extended period of exceptionally low policy rates, three rounds of quantitative easing that have substantially expanded the Fed’s balance sheet, and four full years of robust M2 growth, there is already enough stimulus flowing through the economy to lift inflation back to the Fed’s two percent long-run target. In light of the present size of the Fed’s balance sheet, interest rate increases without further delay are necessary to avoid an even more costly overshooting of that inflation target down the road.

It´s very true that Fed credibility has been “shot to pieces”. But the rest of the argument is far off the mark:

Inflation instead of rising has been falling (and that long precedes the more recent fall in oil prices). The cost of an eventual overshooting in inflation are much lower than the costs of further restraining the economy to avoid that unlikely “accident”.


Money growth, more adequately measured by Divisia broad money (M4) has, if anything, grown very slowly over the past four years (2.7% on average)


Interest rate increases without further delay would only make a bad situation worse.