Jim Bullard has been there, done that more than once when it comes to steering the U.S. economy through some of its most severe challenges.
Jim over as president of the Federal Reserve Bank of St. Louis in 2008, after working for many years as an economist and then its deputy director of research, just as the U.S. economy was sliding into the Great Financial Crisis. And when the Covid crisis led to a brief deep recession, followed by the worst inflation spike in 40 years, Jim convinced his fellow Fed officials to start doing the aggressive rate hikes that finally reined in prices.
After being one of the longest serving Fed bank presidents in history, Jim left the St. Louis team in 2023 to head Purdue University’s Mitch Daniel School of Business in 2023. Like many others before him, Jim he left his role as a district bank president while keeping his deep connection to the policy that he once drove and now monitors
as closely as ever.
So what does Jim see now as Kevin Warsh has taken over as Fed Chair and is deliverig his first semi-annual testimonies to Congress. And as the latest keenly awaited consumer price report comes in softer than expected?
”It was a soft inflation report, which is very welcome. The committee had been enduring quite a few hot reports in a row,” he says. But “it’s only one month’s numbers, ” enough to keep the Fed on the rate hike sidelines at their July meeting, but not to keep them from hiking the key rate in September if inflation is still running above 3% as he is concerned that it will be.
”I always regarded 3% as a kind of red line for the committee because that’s, you know, you’re 100 basis points off your target,” Jim says. “Unless you can tell a pretty good story that it’s going to go back pretty quickly, you really probably have to act to make sure that inflation goes back to target.”
”I don’t think the one and done is a way to is a good way to plan for policy,” Jim says.
On another big issue that has been widely debated within and without the Fed, Jim agrees with Warsh that it’s time to look seriously at shrinking the Fed’s balance sheet.
”I think it’s great to have a task force on this, thinking more carefully about these issues and about where we want to go,” he says. “Chairman Warsh said today in his testimony that, you know, the balance sheet is also part of monetary policy, so you can’t just think of it as plumbing.
Spoiler alert: more specifically Jim says “I don’t think you have to crush down or even want to crush down all volatility and short term funding markets. There may be some market signals there that are probably valuable. So I think there’s a lot of thinking to be done here.”
Soft June inflation report 00:01:53:13
Well, it was a soft inflation report, which is very welcome. The committee had been enduring quite a few hot reports in a row. So this is welcome news. I think it’s only one month’s numbers. It probably doesn’t affect headline PC as much as it might first appear. So you’re probably still looking at core PCE on a 12 month basis.
One month with some minor impact- puts off July move 00:02:23:18
Well over 3%, but still moving in the right direction and something the committee has been looking for. I think in the very short term, I think this will reduce the probability substantially of any policy action in July, and it’ll change the debate a little bit from there.
Committee will be looking more at core 00:03:27:07
Yeah, I think some of it as well. I haven’t seen a breakdown in, you know, in how much. But you know, I guess one thing to just keep in mind is that the committee usually looks at core PCE, and that’s at least on the surface, that’s totally throwing out the energy. So really the energy in some ways shouldn’t have any impact on that.
Dallas Trimmed mean is not key to FOMC 00:03:50:16
You can also look at Dallas Fed trimmed mean, which would throw out some data in a different way that’s running much lower. And that’s something has talked about. But the committee has said that they like core PCE.
Energy leakage beyond headline plus Hormuz backtracking 00:04:07:17
It there is some flow through from energy to other components. I always thought it was, you know, at most 2/10 or 3/10 on that. I would say also about all that. It does not look like the situation in the Middle East is going to resolve cleanly the way markets were hoping for and pricing in, and I think policymakers were hoping for maybe, maybe 6 or 8 weeks ago.
Brace yourself: No quick fix 00:04:40:04
I think this is basically a long-running saga that’s going to continue, and markets are adjusting to that. And they’re not no longer expecting a sort of clean resolution. And because of that, I think you can’t really expect energy prices to come down in the near term the way markets had expected a few weeks ago.
Strong economy 00:05:52:23
And I think the economy is pretty strong. On the consumption side, I think you’ve got especially the top half of the income distribution that’s sitting on major wealth advances from recent years. The, you know, the wealth to disposable income ratio is at an all time high. Stock markets are probably not too far from their all time highs.
Not uniform strength but plenty of it plus the jolt from AI 00:06:18:03
The so for those people you know and they they are the lion’s share of consumption. The world looks pretty good. So I think from a macro of course there are others not doing too well. But but from a macro perspective you’ve got a lot of support for consumption and you’ve got the AI boom going on, which is really leading to booming investment.
3% inflation rate is a red flag for Bullard 00:06:45:01
Domestically speaking, you’ve got a pretty strong U.S. economy that’s probably feeding into some of the inflation pressures that we see. That’s why that committee is going to have to be very careful with their preferred measure of inflation above 3%. I always regarded 3% as a as a kind of red line for the committee because that’s, you know, you’re 100 basis points off your target. Unless you can tell a pretty good story that’s going to go back pretty quickly, you really probably have to act to make sure that inflation goes back to target.
Back in the soup, no end of war 00:08:07:07
Yeah. I don’t know how much more you really have to look for. I mean, I don’t think with these kind of numbers, if you if you got some hot inflation reports, I don’t think you can wait till December. I think it would be too late at that point. Now, I understand you know the committee right now with the war going on, they were kind of looking forward to resolution of the war.
Rate hike in September? 00:08:31:00
And they were looking forward to a report like this one today on inflation tempering the inflation outlook compared to what it was. So for that reason, I didn’t think they would be able to go in July. But by the time you get to September you’ll have more data and maybe a little bit more clarity. You’ve also got Jackson Hole in there, so they could probably use the July meeting to at least make September a live meeting with a possible decision to raise the policy rate at that point. And I think that’s the most likely outcome still as of today.
At Jackson Hole… 00:09:55:18
I don’t know how he’ll use the speech, but I’m sure he’ll talk about. A natural thing to do would be to talk about these issues around the task forces, and that they’re in progress, and these hoping for good outcomes on all five dimensions. That would be the sort of thing that you could use the speech for. And then as you get very close to the speech that you can add in paragraph or so that, you know, might give some indication about policy, but if or you can just sidestep that all together as a chair and not say too much about policy.
Will any task-force guidance be ready by Jackson Hole? 00:10:37:03
So I think he’s disinclined to do for guidance of that type. But we’ll see when we get to Jackson Hole how he wants to handle that. I do think it’s a major venue and it’s a chance to lay out longer run issues. And Kevin Warsh has certainly talked about reform at the Fed. And so he could use that as a as a moment to flesh out his vision for that reform and to give a progress report on how far it is, how far along it is at that point.
The Fed had partial success on inflation then let up 00:12:37:00
They’ve been above target for five years. But I would draw a distinction between the earlier part of that period where inflation was running very high and threatening Fed credibility a very serious way. The committee took substantial action during 2022 and 2023, and that was very successful, but not completely successful. So it got rid of on headline CPI, maybe 600 basis points of inflation. That’s quite a bit without a recession. But the last month basis points are now now 140, 130 basis points are still sticking. So they haven’t been able to get that last last run out of there. And that’s really the second half of that five year period. So I would draw distinction between those two. So I do think it’s disappointing though that they haven’t made progress in the last two and a half years.
Fed needs to step up 00:13:40:07
Whereas you know, two and a half years ago they would have said by now you’d be right at 2%. And they’re not so. And I know they’ve been citing temporary factors and tariffs and so on. I don’t think those arguments are all that strong. I think it’s just been there a little bit more damage than they thought there was. And so they’d have to get tougher in order to get rid of the remaining inflation that they have.
Not a fan of target ranges 00:14:54:04
I’ve always liked the point target better. I think if you name a range, then there’s kind of the implicit idea that if you’re within that range, you won’t take any action in either direction. And so there’s a range of inaction. And then when you get to the border of that range then you would take action. But what happens in practice I think for countries that have done this, is that the higher end of that range is always the place where the economy ends up.
…and people generally do not like inflation 00:15:29:10
So I think that would be too much inflation for the U.S.. And one thing we learned about the most recent inflation episode was that people really do not like inflation. And that comes through in survey work and other types of work on on inflation experience for consumers and businesses. They don’t like operating in a system where the place prices are fluctuating around, going up faster than they thought because they kind of get out of sequence.
Price signals are important 00:16:03:02
You want the prices to send a good signal about what the supply and demand conditions are. And when you have a lot of inflation that gets all mixed up and you make worse decisions both on the business side and on the as consumer.
Can the Fed get away hiking rates once say in September? 00:16:33:20
I don’t think the one and done is a way to is a good way to plan for policy. If if you were if you’re serious that you’re going to raise the rate just once, most people would say, well, that’s not going to have much effect. And so I think if usually the committee wants to realign policy in one direction or the other, so they have several rate hikes or rate cuts in mind in those situations, and then they embark upon that process.
One and done would be an anomaly 00:17:04:12
Now it can turn out that you start on the process of hiking rates, but then the data comes in, in the unexpected direction. And then you decide to back off so it can turn out ex-post that you only end up with one. But I don’t think you would start out saying, oh, we’re only going to do one and that’s going to fix all our problems.
Generally the surprise works in the other direction… 00:17:27:08
That’s not usually the way this works. So and in fact, usually the way it works is you start on something and the data is even worse than you thought and you have to move even more. So we’ll see if that happens. So it can go in both directions. But I think as a planning, as part of the planning process you would plan for, the reason we’re doing this is we expect that we’ll have to do, you know, 75 basis points or 100 basis points over some period of time in order to get the inflation outlook to be what we want it to be.
Focus on productivity 00:19:37:11
I think he has in mind the productivity boom and the second half of the 1990s, which was a famous episode in US macroeconomic history. And it was tremendously beneficial to the US economy. The economy grew at, you know, roughly 4% for for many years in a row. We paid off a lot of the national debt during that period. So it was really boom times for the US economy. Unemployment rate went down to 3% range. So and inflation stayed low and close to 2%. So really good period for the US economy. So hopefully we can replicate that with the important new general purpose technology of artificial intelligence. I think I’d have to say that this, you know, looks like a bubble at this point.
Good bubble… 00:20:34:18
It’s a good bubble, the same way that the internet was a good bubble. You had new technology coming on. It was important and it did pervade the entire economy. And now we all use the internet every day, all day. So I think the same thing will happen with with AI. That does not mean that every single company that’s claiming something about AI is going to make money, does not mean that they’re all really worth what they think they’re worth.
Still lots of questions and risk 00:21:07:00
It doesn’t mean that they all really have a product that they’re going to be able to sell to consumers and businesses and get them to actually pay for it. So. So there’s a lot of questions out there about exactly how this will proceed going forward. And ultimately, from a macroeconomic perspective, this has to enter into actual productivity growth for the whole economy.
The technology payoff has a gestation period 00:21:30:01
And you know, we’re probably not seeing that yet and might be quite a while before we see that, because it’s not just about having the technology in place. It’s about actual diffusion of the technology into these complicated corporate cultures. Those businesses are well established. They have well-established ways of doing things. Yes, you can change them. Yes, you can introduce new technology, but it’s not as easy as you think. And it doesn’t happen, you know, in two and a half weeks or whatever. Some of the biggest proponents have been arguing. So I think, I think it will take quite a bit more time than, than people realize or people think right now, but it will happen. And so in that sense, it’s a good bubble and it’s good. Good that there’s a lot of enthusiasm and a lot of investment behind it.
Balance sheet myths 00:22:49:11
Or there’s I think there’s some absurdity in some ways about on the balance sheet argument that you had an economy that ran on a much smaller Fed balance sheet seemed to work fine most of the time. Now the argument is, you know, somehow it has to be really, really large. I think you could accomplish all the same goals that people might have, but not have as much of a footprint in financial markets.
Warsh’s balance sheet instincts are right 00:23:22:01
So I think Kevin Washes instincts are right about that. I don’t think you have to crush down or even want to crush down all volatility and short term funding markets. There may be some market signals there that are probably valuable. So I think there’s a lot of thinking to be done here. Otherwise you might you know, if if you know 5 trillion is good is 10 trillion better or 15 trillion or, you know, where are we going here? And so I think it’s great to have a task force on this, thinking more carefully about these issues and about where we want to go, I see that Chairman Warsh said today in his testimony that, you know, the balance sheet is also part of monetary policy, so you can’t just think of it as plumbing.
An inconsistent position by the Committee- 00:24:19:22
And the committee has vacillated about that at times. They want to claim that, hey, we’re buying bonds and this is affecting the yield curve and that’s affecting monetary policy. And then at other times they want to say this is just this is just background to provide maybe some financial stability or some reduced volatility. And I think I think sorting that out and not downplaying probably either side of that argument is probably the best way to think about the balance sheet going forward.
The complex issue of forward guidance 00:25:45:09
Yeah, I think the issue here is that, you know, defining what you mean by forward guidance. You could have a Taylor type policy rule or even approximation to a Taylor type policy rule that’s telling you it’s actually what the Fed would do in all sorts of different situations. So in a way it is a roadmap. But that’s different from saying I guess that for sure we’ll take a move at this in a particular direction at this particular meeting.
The forward guidance trap 00:26:20:11
And I think that’s the thing that Kevin Warsh wants to get out of, because he thinks it has just cause problems for the committee at times. And I do have a example for you which you might remember, which would be December 2018, where the committee have been raising the policy rate quarterly. And they got to the December we got to the December meeting that year. And, you know, in November, the data was not that great. Now, they could have just waited at that meeting. That’s what I console at that meeting, that just wait until January and let’s see if this clears up. But they didn’t do that. They felt like, hey, we’ve committed to doing this. We said we would do it, so we’ll do it.
Or forward guidance handcuffs 00:27:11:14
And then they got a lot of volatility over the winter and into January. And then by the time you got to January then you had to change policy. So can and Jay did that. But that’s a that’s an example of well why didn’t you just, you know, why why don’t you feel more free to just to just say well…and surprise markets at the December meeting by being dovish.
Warsh wants ‘out’ of that sort of commitment 00:27:39:10
But we’ll wait a month and or six weeks or eight weeks and just see how the data come in. And then, and then we can go from there. So I think that would have been a little more green in there too. But so I think that’s the sort of thing that Chairman Warsh wants to get out of that kind of a box and not create problems and shoot yourself in the foot.
Let markets trade and react 00:28:14:10
Yeah I do think it’s a matter of you know, would you be willing to put up with volatility on the day because you’d be surprising markets on the day. You’d say, yeah, we were going to raise rates here, but we’re not going to do it. And so markets are saying, oh you surprised us. You know which. But I think that’s okay.
Volcker era was different 00:29:08:20
I think the Volcker era was different. I mean he had the FOMC; it had very little credibility when he started. So, he had to build all that up over time. And a lot of that was sometimes surprising markets by being tougher than they had expected. And even when he did that they still didn’t believe him. So he had spent most of his tenure building up credibility that he would act in, you know, with sufficient vigor to keep inflation low and stable.
Having credibility at the start makes a huge difference 00:29:42:08
And so policy makers like me that came along later benefited from the fact that he had built up all that credibility over time. But if you have the credibility in your pocket, it’s a different game. You don’t have to take us as tough of an action either on either side in order to convince markets that you’re serious.
Jim Bullard
James “Jim” Bullard, former president of the Federal Reserve Bank of St. Louis and one of the nation’s foremost economists and respected scholar-leaders, was chosen in July 2023 as the inaugural dean of the reimagined Daniels School of Business at Purdue University.
Bullard, who took the reins as the Dr. Samuel R. Allen Dean on August 15, 2023, is charged with inspiring, further developing and implementing Purdue’s reimagined approach to a top-ranked business school across undergraduate, graduate, executive and research programs, preparing tomorrow’s business leaders and entrepreneurs in the Daniels School that is grounded in the principles of free enterprise, free market economy in generating opportunities and prosperity, and in the hallmarks of a well-rounded Purdue education and with a particular emphasis on tech-driven, analytics-based business success.
To further reflect and to maximize the impact of Bullard’s unique, national leadership experience, he also serves as Special Advisor to the President of the university, reporting to President Mung Chiang in that capacity. Bullard is also a Distinguished Professor of Service and Professor of Economics in the Daniels School.
Serving 15 years as the sitting president and chief executive officer of the Federal Reserve Bank of St. Louis, Bullard earned significant praise and accolades for his long-standing leadership and innovative thinking as part of the Federal Open Market Committee (FOMC) in guiding the direction of U.S. monetary policy. A noted economist and scholar, Bullard had been the longest-serving Federal Reserve Bank president in the country and ranked as the seventh-most influential economist in the world in 2014. His scholarly impact has been based on research-based thinking and intellectual openness to new theories and explanations. That allowed Bullard to be an early voice for economic change, helping the Federal Reserve deftly navigate complex economic landscapes such as the COVID-19 pandemic and the financial crisis during his tenure.
Before becoming president in 2008, Bullard served in various roles at the Federal Reserve Bank of St. Louis, starting in 1990 as an economist in the research division and later serving as vice president and deputy director of research for monetary analysis. For 15 years, he directed the activities of the Federal Reserve’s Eighth District, which branches into several states, including an extensive portion of southern Indiana. While serving on the Federal Reserve’s Open Market Committee, Macroeconomic Advisers named Bullard the FOMC’s second biggest mover of markets in 2010 behind Chairman Ben Bernanke and the biggest mover of markets in 2011 and 2013.
During his time as an academic economist and financial policy scholar, Bullard’s research has appeared in premier journals, including the American Economic Review; the Journal of Monetary Economics; Macroeconomic Dynamics; and the Journal of Money, Credit and Banking. The majority of his research is some form of macroeconomic analysis, focusing on monetary policy, inflation/deflation, and macroeconomic stability.
Bullard served as an honorary professor of economics at Washington University in St. Louis, where he also sat on the advisory council of the economics department as well as several advisory boards. The St. Louis Post-Dispatch named him the Top Workplace Leader among the region’s large employers as part of its 2018 Top Workplace Awards. Active in the community, Bullard has served on the board of directors of Concordance Academy of Leadership in St. Louis and was formerly the board chair of the United Way U.S.A. He is co-editor of the Journal of Economic Dynamics and Control, a member of the editorial advisory board of the National Institute Economic Review and a member of the Central Bank Research Association’s senior council.
Born in Wisconsin, Bullard grew up in Forest Lake, Minnesota, and received his doctorate in economics from Indiana University in Bloomington. He holds Bachelor of Science degrees in economics and in quantitative methods and information systems from St. Cloud State University in St. Cloud, Minnesota.
