Bullard Weighs In on Inflation, Expects Fed to Cut

When you look at where we are, if you were on the committee today, what would you think needs to be done? Yeah, I think the amount of disinflation that occurred in the second-half of 2023 was a lot, 200 basis points on the core PC 12 month inflation rate from 4.8 to 2.8. So that’s big in this game and that’s the kind of thing we haven’t seen on that variable in many, many years. So very successful. But as you know the January, February, March reports stalled out a little bit and so but you’re still sitting at 2.8% on a 12 month basis. So I think the challenge for the committee is to somehow take that disinflation on board because it does mean that you should have a lower policy rate without signaling that you’re giving up on the last bit of inflation 80 basis points that you need to get back to 2%. So I think that’s the fundamental challenge. I think the wind’s been blowing in the wrong direction during the first quarter and into the into April here. Well, we have a lot of bond investors who watching this programs and listening to this show. Why do you think we need lower rates? The argument from the Fed, from Jay Powell even on Wednesday was that the economy is fine right now where it is and we don’t need to do anything. Yeah, I mean it’s a good problem to have the the committee’s been very, very successful here. Economy is growing at a good pace. Labor market is very strong. Today’s report, a little softer than the last time, but still a very solid report. And you know, inflation is above target, but not nearly as much as it was. And certainly most people think it’s going to head back to target as we go forward. So these are good problems to have. So it’s mostly about the tactics of exactly how to play this going forward. Now, one thing is that inflation, by the metrics I’ve been talking about, is only 80 basis points above target, but the policy rate is some 250 basis points above neutral. So that’s a lot given that you’re only a relatively small distance from target. So that adjustment has to be made at some point and they have to get going on that at some point. But they want to do that, I think when the wind’s blowing in a little better direction for that. Well, there’s an argument that the the things that are causing inflation these days are not things that are affected by monetary policy. So whether you’re set too high or not, it isn’t going to bring down inflation from here. No, I don’t really think so. I think inflation is a monetary phenomenon that’s assigned to the central bank. The central bank can control inflation over a five year period over the medium term and this episode is showing how powerful that can be. So I think it really is up to the Fed to get the inflation rate in the medium term. There certainly is noise and the data, but that’s not the main thing. I don’t think the the noise can be positive or negative on a on a given day, but but the trends are controlled by the central bank. Was there a risk if they leave policy too tight for too long? There is. I think it’s not a huge risk, but you know inflation could come down as we go through the rest of this year. I think many are thinking that that’s going to happen and the policy rates way up in the 5% range, which would be too high for that kind of situation. So I think if the right moment arises, they can, they can make a move and start to inch the policy rate down. Another thing I think is that you don’t have to, you can make a move without promising a whole sequence of moves. You know, you just make a move because you want to take on board the good news that we’ve had since last summer. Let me ask you from your long experience on the committee how you think about the markets and their relationship to the Fed. I did a chart yesterday and put it out on X if people want to look for it, what you chose, since July of 2023, the Fed funds rate hasn’t moved, Fed hasn’t acted at all, and yet the markets have gone like this. Does that affect what how you think about the transmission of policy or the criticisms that you’re behind or ahead of the curve or what do those affect the way you think? No, it’s critically important. And I think economists are even today are still struggling to understand exactly how this complicated dance works because it’s not just the policy rate today, but the expected policy rate in the near term. One way to look at that is the two year treasury yield. And if you look at that over the last year or a year and a half, it’s I’ve called that chart Mr. Toad’s Wild Ride because at different junctures it looked like the Fed would go higher than it looked like the Fed might go lower. And while the the policy rate itself is a fairly smooth chart, the two year has been going up and down because of expectations about Fed policy. So I do think that’s critically important as to how policy works. I think it helped the Fed when we were raising rates the two year went up much faster than the actual policy rate. That was helpful. And last December when Chair Powell said that the, you know, rate cuts were coming into view, the markets ran with that in the two year decline maybe 100 basis points and now it has come all the way back. So this it’s a lot of volatility. I know the move index is is high, so it’s very important. I think you talked about the expected future path of monetary policy. Now that you’re not on the committee and don’t have to worry about it, what is your expected path? Do you think they will cut this year? I do. I do think they’ll get the moment where it’ll make sense and you you will get a little bit further disinflation that’ll allow them to come down out of the 5% range. But it’s going to be data dependent and you know it’s a fickle world. So when you’re when you’re looking at the data, you never quite know what’s around the corner in macroeconomics. But I do think they’ll find their their moment here to get the policy rate down but still stay restrictive. I think that’s the key thing. Even if they came into the high force somewhere, you know you would, that would still be a relatively high policy rate. It would still be putting downward pressure on inflation. So to me the goal is to get from here to get inflation to asymptote down to 2%. So you want this gentle landing, ideally this gentle landing into into 2% so hopefully they can get that. Colleges have been in the news a lot lately for for all the wrong reasons. One last question, what was easier being on the Fed board or being a Dean in a college that both very challenging jobs and I like that. I like to, you know, be actively involved in doing a lot of things all the time, but we’ve got a lot of growth at the Daniel School of Business and a lot of support from our alums and many outside the university as well. So it’s a great project. It’s not easy, but it’s it’s a great project and we’re having a lot of fun.