Bloomberg television reporters Betty Liu and Michael McKee recently interviewed James Bullard, President of the Federal Reserve Bank of St. Louis.? The following is a transcript from that interview.
Paying attention to international developments?
“Certainly, the Fed pays a lot of attention to global developments all the time and we made a small wording change in the statement. I think that is just reflective of the fact that we are always talking about the global economy, and how those factors are going to come back and affect the U.S. economy. The changing in the statement on the phrase is the reality of the discussion around the table.”
GDP?
“2.6 percent on GDP is fine. That’s not too far from what we had for tracking estimates. We’ll see if revisions move it higher. There’s a lot of underlying momentum in the U.S. economy and that shows up in the jobs numbers, which look strong. We’ve had one of the best years for job growth since 1999. I now think unemployment will go down below 5 percent by the third quarter. GDP is more in a string of positive developments.”
Can you raise rates with headline inflation falling, or even stable at around 1.5%?
“As long as we feel confident that inflation will go back toward our target right now, that’s my baseline projection.
“Zero interest rates are not the right interest rates for this economy. Inflation is low, but not low enough to rationalize zero interest rates. Zero is a long way away from normal. That is why I think there is some pressure to come up off of zero. Even if you came off of zero, 50 basis points, 75 basis points would still be low level, extremely accommodative, and mean we’re moving back to the inflation target.”
What would fed do if inflation creeps back up into the economy?
“One of the risks would be you get later in the year that unemployment has come down below 5 percent and inflation has stabilized and come back up. If we haven’t moved by that point, people will say we’re behind the curve. We would have to move more aggressively at that point. That kind of dynamic is not a good one for the central bank. If I were going to play it strategically, I would just say I would rather get off of zero sooner and then have more flexibility to go slower and react to data. I think that would be the more prudent way to go about this, but I do not know how the committee will go down.”
How is oil affecting inflation?
“Right now, the oil price decline has been so dramatic. This is no ordinary oil shock. That huge drop in oil prices is probably contaminating inflation expectations.”
“We will have to let the oil market settle down, stabilize at some level. Once that happens, we will go back and look at longer-term inflation expectations and see what happened. I would expect them to gradually come back up. we will see. If that does not happen, I would get concerned our credibility was eroding and markets were starting to doubt our ability to hit 2 percent inflation, which they should not do, because we will hit 2 percent inflation.”
Mr. Bullard ended the conversation by saying:
“It’s a wild bucking bronco to forecast the U.S. economy.”