Monday, October 12, 2009

Providing nuance 

We were happy Friday to have our alumnus, St. Louis Federal Reserve president Jim Bullard '84 on campus to receive the Herberger College of Business Leadership Award during our homecoming. He gave a most interesting talk to our students and faculty (and a few community members). He said to me in the car as we drove to campus that he considered himself one of the most hawkish presidents regarding inflation, and indeed during his talk seemed to advocate an inflation target of zero percent. (This anonymous poster on a bulletin board seems to have heard the same thing. The news reports suggested he favored an inflation target of 1.5-2%, which is more consistent with the views of Chairman Bernanke.) You can hear a minute the talk on this campus report on his visit where he differentiates between "too big to fail" and "too big to fail quickly."

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 [1996].) 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'.