James Bullard Presentation On Recent Developments In Monetary Policy

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In the second day full of Fed president speeches we hear from St. Louis hawk James Bullard who spoke in Prague on recent developments in monetary policy, and delivered remarks titled “U.S. Monetary Policy: Recent Developments” as part of a central bankers panel discussion at the 19th European Banking and Financial Forum in Prague. During his discussion, Bullard explained how the Fed’s second round of
quantitative easing was “a classic easing of monetary policy” and “an
effective tool, even while the policy rate is near zero.”  He also
discussed the situation in early 2011, stating that “U.S. growth
prospects remain reasonably good for 2011.”  He added that recent global
and domestic events “present considerable uncertainty, but can be
resolved in benign ways.” Finally, Bullard talked about the path to
normalization.  “Discussion of the normalization of U.S. policy will
likely return as the key issue in 2011,” he concluded.  Overall, the presentation had a not surprisingly hawkish tone. Don't forget it was precisely a year ago that the Fed was being extremely hawkish all over again, with reverse repos flying left and right, and everyone expecting that the economic "growth" was self sustainable, until it wasn't.

More highlights from Bullard:

The Situation in 2011

Bullard stated that, relative to last summer, U.S. growth prospects
improved by early 2011.  “Private sector forecasters and the FOMC all
marked up their forecasts,” he said.  “Anecdotal reports were more
bullish,” showing “profitable businesses with considerable cash and an
improving outlook.”  He added, “An improving economy 18 months
post-recession is generally a strong positive.” 

Noting the improved economic outlook since QE2 was implemented, “the
natural debate is how and when the exit should begin,” Bullard said.
 “However, additional uncertainty has clouded this picture.” 

“In recent weeks, macroeconomic uncertainty has been on the rise from
four key sources,” Bullard said.  The four sources he discussed were:

  1. turmoil in the Middle East and North Africa and the associated uncertainty premium in oil prices;
  2. the natural disaster and the damaged nuclear reactors in Japan;
  3. the U.S. fiscal situation and the possibility of a government shutdown; and
  4. continued uncertainty regarding resolution of the European sovereign debt crisis.

Bullard pointed out that all four situations have the potential to
escalate.  If escalation occurs, he added, how and when to begin
normalizing monetary policy would become less clear.  “Still, the most
likely prospect is that all four are resolved without becoming global
macroeconomic shocks,” he said. 

Normalization of U.S. Monetary Policy

Bullard said that U.S. monetary policy cannot remain
ultra-accommodative indefinitely.  “The process of normalizing policy,
even once it begins, will still leave unprecedented policy accommodation
on the table,” he stated.  “The FOMC may not be willing or able to wait
until all global uncertainties are resolved to begin normalizing
policy.”

Bullard noted that normal monetary policy has two parts: “QE
accommodation is removed by returning the balance sheet to an ordinary
size over time,” and “the policy rate begins to approach levels
associated with moderate expansion.”  Bullard said that normalization
will take time and added that it is the most difficult part of the
business cycle for a central bank.

“Exit strategy was widely discussed in 2010, and that debate will likely revive during 2011,” Bullard said.

Full presentation

Bullard Prague