Monday, October 12, 2009
Bullard is now in the middle, it appears, of a rift over when to turn off the deluge of liquidity in the marketplace, that has aligned presidents on both sides of the issue. Yesterday at the NABE symposium he gave a pretty sharp message on his hawkishness, both noting that the Fed was too slow last time to raise rates which may have fueled a bubble in housing and saying "gap-based theories of inflation were badly discredited in the 1970s." The latter, says Arnold Kling, is evidence that they may be differentiating between this as a supply or a demand shock. (It's worth remember that Larry Summers was co-author of a paper on hysteresis of unemployment rates, which if true is evidence in favor of Bullard's statement. See also Stanley Fischer .) If he accepts that the unemployment rate doesn't tell you anything about slack demand, Bullard is much more likely to be an inflation hawk. The two concepts are interrelated, as Bullard points out: "If part or most of the fall in output was a collapsed [housing] bubble, then today�s output gap would be smaller than it appears."
However this report from Bloomberg a couple of hours ago may indicate his comments were more hawkish than he wanted them to be.
�You want some jobs growth and unemployment coming down. That is a prerequisite� for an increase in interest rates, Bullard said. �It doesn�t mean you need unemployment all the way down to more normal levels.�I think that's known as 'providing nuance'.