Friday, June 21, 2013

Bullard Dissent

Jim Bullard has elaborated on his dissent at this week's FOMC meeting. Bullard has three objections:

1. The Fed has interpreted its price-stability mandate as a 2% inflation target. Given that the current 12-month pce inflation rate is well below the target, the FOMC should be addressing that. In Bullard's words:
...the Committee should have more strongly signaled its willingness to defend its inflation target of 2 percent in light of recent low inflation readings. Inflation in the U.S. has surprised on the downside during 2013.

2. Bernanke's elaboration at his press conference yesterday on how asset purchases would be wound down was inappropriately-timed. Apparently parts of Bernanke's statement at the press conference were approved by the FOMC and seem to have been intended as an extension to the formal FOMC statement. Here's the relevant passage from the press conference:
Although the Committee left the pace of purchases unchanged at today’s meeting, it has stated that it may vary the pace of purchases as economic conditions evolve. Any such change would reflect the incoming data and their implications for the outlook, as well as the cumulative progress made toward the Committee’s objectives since the program began in September. Going forward, the economic outcomes that the Committee sees as most likely involve continuing gains in labor markets, supported by moderate growth that picks up over the next several quarters as the near-term restraint from fiscal policy and other headwinds diminishes. We also see inflation moving back toward our 2 percent objective over time. If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year; and if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear. In this scenario, when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7 percent...
Bullard's point is that Bernanke was emphasizing the wrong thing at the wrong time (or the right thing at the wrong time?).

3. Bullard did not like the language in Bernanke's statement at the press conference (authorized by the FOMC) that referred to calendar dates rather than state contingencies for reductions in asset purchases. The objection seems to be to the parts of Bernanke's statement quoted above where he says "...appropriate to moderate the monthly pace of purchases later this year..." and "...through the first half of next year, ending purchases around midyear."

Bullard is right. The official FOMC statement says:
The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.
But the committee is saying other things inconsistent with that statement. Bad communication is a central banker's worst enemy.


  1. It doesn't make any sense that the FOMC is specifying dates for policy changes, precisely because the FOMC policy is data dependent. The FOMC has no clue what it will do next year; it all depends on how the data are coming in.


  2. Note that, in Bernanke's statement, he tells you that the dates are conditional on the Fed's forecast. I guess what you're saying is that the forecast isn't worth much. Maybe that's Bullard's point too.

  3. Bernanke seems to be much more focused on the outlook than Bullard. Does Bernanke really believe that the Fed can accurately forecast the macro economy 4-6 quarters into the future? Theoretically it makes sense for the FOMC to be forward looking, but it's less useful if in reality the Fed's forecasts come with substantial error bands. Real-time confirmation matters a geat deal, I think.