Last March, I had the opportunity to attend the Credit Suisse Asian Investment Conference with Project Firefly. Throughout the week in Hong Kong, my fellow finalists and I witnessed a number of insightful discussions on economics, politics, development, and international relations. These speakers were world renowned leaders of governments and central banks, economists, and well regarded authors. The essay I had written was on the subject of monetary policy, so naturally I was most excited to see speeches from central bankers.
One of the speakers was President of the Federal Reserve Bank of St. Louis James Bullard. As President of the regional bank, Bullard rotates on and off the Federal Open Market Committee, the body responsible for setting monetary policy in the United States. Bullard has become known as a more hawkish member of the committee, frequently dissenting from some of the FOMC's policy decisions. Over the previous three years, I had become skeptical of Bullard's monetary policy views, and I was excited to hear him defend them in person.
Bullard's main disagreement with the other members of the Federal Reserve is that he believes the U.S. economic output gap is much smaller than assumed by others. As a result, he believes that additional monetary stimulus will fail to reduce unemployment and only lead to an increase in inflation. This suggests that problems in the U.S. economy are more structural in nature and may require supply side labor market reforms.
In the time since Bullard's speech, the FOMC has embarked on even more aggressive easing policy, committing itself to purchase agency mortgage backed securities on a continuous basis until there is substantial recovery in the labor market. The FOMC has named specific targets, committing itself to easy monetary policy until unemployment drops below 6.5% or inflation rises above 2.5%. These actions by the FOMC may represent a revolution in Federal Reserve thinking. Instead of targeting and adjusting interest rates, the Fed may openly communicate macroeconomic target objectives, and use open market purchases to achieve these objectives. This strategy is similar to NGDP targeting, a monetary policy regime I advocated for in my Project Firefly essay last year.
The next few months will provide us with additional evidence in this debate over monetary policy. Those who are interested should pay especially close attention to inflation expectations, the unemployment rate, and growth over the next few months, as these variables will be helpful in assessing the efficacy and risk of recent FOMC action. It will be interesting to see how Bullard's speech holds up one year later, and what monetary policy experts say at the next Asian Investment Conference in March.
You can click here and read what Charles told us after the last year's conference.