Man To Watch at the St. Louis Fed: James B. Bullard

5 July 2008

I haven't yet done detailed research, but the Federal Reserve Bank of St. Louis seems to have a new President and CEO who is worthy of being watched.

James B. Bullard replaced William Poole in his present position on April 1, 2008. He is so new in the national limelight that his name entered into Wikipedia is more likely to get you a British soccer player, though as you'll see, he has a worthy and extensive resume. He will now represent the Bank on the Federal Open Market Committee (FOMC), the Federal Reserve’s chief monetary policymaking body.

Mr. Bullard seems to be talking a new line. Perhaps he is only saying the things he is saying because he is new to the game. But if he keeps up this kind of talk, real changes at the Fed (which are now two decades overdue) could be possible.

What is Mr. Bullard saying?

How about this (quoted by Reuters on July 3, 2008):

"The Federal Reserve's use of core inflation measures is harming its credibility."

Or this:

"Focusing on inflation indices that exclude food and energy work well when those prices are rising at rates similar to those of other prices, but that is not what is happening today."

What about writing this in the bank's official magazine, The Regional Economist:

"It is hurting Fed credibility to say that we are trying to keep inflation low and stable, but at the same time we are not counting some of the prices that are going up at the most rapid pace."

In June, Mr. Bullard said that the Fed needed to start raising interest rates this year to tamp down inflation.

"Price stability should be the number one goal of policy-makers today," he wrote, defining price stability as "a small, positive rate of inflation, say 0.5 to 1.5 percent a year, depending on the price index being used."

Want to know more?

Here is Mr. Bullard's official biography:

James B. Bullard President and Chief Executive Officer Federal Reserve Bank of St. Louis

James B. Bullard took office as president and chief executive officer of the Federal Reserve Bank of St. Louis on April 1, 2008. He directs the activities of the Bank’s head office in St. Louis as well as its three branches in Little Rock, Ark., Louisville, Ky. and Memphis, Tenn. In addition, he represents the Bank on the Federal Open Market Committee (FOMC), the Federal Reserve’s chief monetary policymaking body.

The Federal Reserve Bank of St. Louis is one of 12 regional Reserve banks which, along with the Board of Governors in Washington, D.C., constitute the Federal Reserve System. As the nation’s central bank, the Fed is responsible for conducting monetary policy, supervising banks and operating the nation’s payment system.

Mr. Bullard joined the Research division of the Federal Reserve Bank of St. Louis in 1990, and held increasingly responsible positions in the division. Prior to being appointed president, he was deputy director of research for monetary analysis.

A native of Forest Lake, Minn., Mr. Bullard holds a Bachelor of Science degree in quantitative methods and information systems and economics from St. Cloud State University in St. Cloud, Minn., and a doctorate in economics from Indiana University in Bloomington, Ind.

Mr. Bullard has written numerous scholarly papers published in professional journals and has been a peer reviewer for over two dozen periodicals or institutions. He has participated in over 150 conferences, symposia or lectures sponsored by foreign central banks, academic institutions and monetary policy groups around the world.

Mr. Bullard enjoys bicycling and tennis. He is married to Jane Callahan; they have two daughters.

I think this fellow might really be different. Since election to his new and influential post, he has been willing to take on Lewis Carroll's Humpty Dumpty (who, as you know, uses words to mean what he personally chooses them to mean).

Note what Mr. Bullard has to say about price stability in his address to the Macroeconomics Advisers' Quarterly Outlook Meeting:

"In contemporary discussions, the term 'price stability' has come to mean something other than 'stable prices.' In the late 19th and early 20th centuries, price stability meant that variations in the general level of prices would be transitory and the price index would revert to a mean.

"In recent policy discussions, however, price stability generally is interpreted as a small positive rate of inflation. If there is ongoing inflation, the level of prices does not revert to a constant, but trends upward. I am willing to accept this latter definition of price stability because there may be theoretical and practical reasons to believe that the best price indexes we have available are subject to upward biases. While I am not a big fan of the upward-bias argument—after all, the best-available adjustments are already made to the indexes—I admit that I do not have better measures myself.

"My preferred definition of price stability is that trend inflation, correctly measured, is zero. In practice, this likely converts into a trend in measured inflation on the order of ½ to 1½ percent, depending on the particular price index referenced."

I have read Mr. Bullard's recent speech in detail. I can assure you that he is making efforts to be politically accommodating. He praises Alan Greenspan's achievement of "low rates of inflation" without mentioning that under the Greenspan administration, the United States entered into what was probably the most horrific bout of asset inflation in its history (through the successive stock market and real estate bubbles).

He also states - very politically - that "the Fed’s new lending facilities combined with an environment of low interest rates have gone some distance to return markets to more normal operation."

One could also argue that the new lending facility has rescued the bad (financially reckless) guys at taxpayers' (prudent savers') expense, and many critics of broad government policy have made just that point!

In fact, the general practice of bailing out the irresponsible with the tab delivered to the provident taxpayer (at both the personal and business taxation levels) has driven both government and Fed policy with few exceptions since the institution of the Federal Reserve system in December 1913.

Nonetheless, let's allow Mr. Bullard to be politic. He still seems to be a voice in the wilderness in his present position, and that in itself is a welcome development.

In his June 11, 2008 speech, Mr. Bullard stated in moderate terms what he said more directly to the press on July 3:

"Let me turn now to make a few comments on the issue of core versus headline inflation. Since July 2004, the FOMC has focused on inflation measured by the core PCE price index in the semiannual Monetary Policy Reports. I think everyone in this room is aware of the fact that, for most of the time since 2003, headline inflation has exceeded core inflation.

"According to core PCE measures of the price level, prices are about 11 percent higher than they were in the beginning of 2003. But according to the headline PCE measures, prices are about 15 percent higher than they were in 2003. Unfortunately for all of us, we face the headline prices, not just the core prices. Many are asking, What are the relative merits of focusing on core rather than headline inflation?

"Core measures of inflation defined as excluding food prices have been constructed by the BLS at least since 1957. Core measures of inflation excluding both food and energy prices have been published since 1977. The rationale for these measures is not well documented, but it is likely that the original intent was to better reveal underlying inflation trends. Historically, real food prices have exhibited large transitory movements. Some of the major changes in real energy prices in the 1970s and mid-1980s also proved transitory.

"Under these conditions, a focus on core measures gave policymakers a clearer indication of changes in the trend of inflation that was subject to policy control. Much of the volatility of these prices originated with supply shocks in particular markets: droughts, crop failures, abundant harvests, OPEC boycotts, political disturbances in major oil-producing countries, and the collapse of the world oil market. Supply disturbances of this sort do not produce the persistent spreads between headline and core inflation measures that have been observed over the past five years.

"I believe that consideration has to be given to the hypothesis that different forces have driven the relative prices of food and energy in the recent past—namely, shifts in demand in world markets. These forces are likely to persist for some time. In particular, I have in mind rapid increases in standards of living in large emerging-market economies. Associated with these increases in living standards are higher consumption of calories and higher consumption of energy and thus increasing demand in the global markets for these products. With low short-run elasticity of supply for food and energy production, these trends in demand generate trends in relative prices.

"The best forecast is that China, in particular, will continue to grow at a rapid rate for the next decade. Longer-run elasticities of supply for agricultural products are likely substantially larger than short-run elasticities, and hence the recent trend in relative prices of food may be expected to moderate. Trends in relative energy prices may moderate with the emergence of new technologies. Nevertheless, a plausible case can be made that current trends in these relative prices will persist and that, therefore, headline measures of inflation will remain above core measures.

"Should policymakers take into consideration persistent differences in headline and core measures of inflation? I believe that consistency requires attention to such differences in the formulation of policy. Unless there are compelling reasons to do otherwise, policy has to focus on the prices actually faced by households and businesses.

"Persistent and substantial trends in other relative prices are not factored out in measuring overall inflation trends. The relative prices of computers, communications equipment, and consumer electronics, for instance, have been falling for decades. However, no one to my knowledge has argued that we are understating the fundamental trend in inflation because our core measures do not exclude these items.

"Let me stress that I do not have an answer to this question, but I think it has become an important concern for the FOMC. Again, what is new here is relative price trends in food and energy that may plausibly be expected to persist for some time. If it were just a matter of the food and energy components being volatile, I think a theoretical case could be made that these prices contain too much noise and so should be ignored in day-to-day policy decisions. Historically, the ex-food and energy calculation seems to have worked well, even though arbitrarily ignoring certain prices is not very elegant. With relative price trends, the ad hoc approach to this question is becoming increasingly untenable."

Wow!

Somebody - particularly somebody at the Fed - needed to say this!

Mr. Bullard is being "politically correct" for sure, but this is still new talk in the dark, twisted and obfuscated hallways of the Federal Reserve system.

I'm glad this gentleman will be sitting on the Federal Open Market Committee (caution: it's a rotating position, and his first turn doesn't come until 2010). I just hope that he doesn't get squashed like a bug by his considerably more profligate compatriots!

• Mr. Bullard's speeches since taking on his new position can be found here.
• Mr. Bullard's Curriculum Vitae can be found here.
• Extensive links to full texts of Mr. Bullard's speeches and writings are located here. (Caution: This is technical stuff written for an audience with Ph.D.'s in economics. Mr. Bullard has a particular interest in human behaviour and social learning, which appeals to me as a psychologist.)