James Bullard Presentation On Recent Developments In Monetary Policy

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


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