Constituent policy

Fed’s Bullard and Professor Siegel discuss inflation and Fed policy

Federal Reserve Bank of St. Louis President James Bullard was a recent guest on “Behind the Markets” podcast on Wharton Business Radio, hosted by Jeremy Schwartz, global CIO at WisdomTree, and Jeremy Siegel, professor of finance at Wharton. Bullard and Siegel discussed all things inflation, diving into the data and the decisions the Fed has made so far regarding its monetary policy.

A look at labor markets

The last two spoke in February this year when Bullard predicted unemployment would fall below 3% and real GDP would be between 3.5 and 4%. Since then, a lot has changed, with the unemployment rate currently standing at 3.5% and the labor market proving to be both resilient and strong.

“The unemployment rate hasn’t come down below three percent, but it’s three and a half and I’m having a hard time seeing unemployment rising with all the job openings we have,” Bullard said. . He went on to explain that there are currently 1.7 job vacancies for every unemployed person, a number that has fallen slightly but remains “unprecedented”.

All measures of the labor force reflect one of the strongest labor markets the United States has seen since the 1990s, a period arguably the strongest labor market in the United States since the end of the Second World War.

“It gives the Fed some leeway to tackle the inflation problem now, while we can and hopefully bring the inflation rate closer or back to our 2% target relatively quickly in terms of macroeconomics,” Bullard explained.

Looking ahead, Bullard does not believe that disinflation will be so much tied to the labor market as it will instead be tied to the “product side of the market where companies worry if they raise prices too aggressively they will lose market shares”. “It’s a trend that would reward low-cost suppliers and inherently reduce costs across industries.

“That’s my interpretation of what happened during the disinflation of the 1980s where lower-cost suppliers flooded the market and companies that weren’t nimble enough or too willing to raise prices were pulled out. their market share,” Bullard said. Explain.

The (wrong) measure of the CPI

The conversation turned to the sharp drop in homebuyer interest that is happening right now and the big lag that is happening in the reporting of house prices and rents and how that feeds into the CPI .

“I think because of the lagged way the government is bringing it in, that housing component is going to continue to add a lot to the core, it’s real shadow inflation and it worries me that if you just look at that rate base and say ‘oh my god, we’re not making progress, keep walking,’ the Fed is going to go way too far in this situation,” Siegel said.

Bullard explained that there are a variety of other ways to look at inflation data that can exclude the rental element if necessary, as well as other data sources that the Fed can and does use when determining its monetary policy. He goes on to detail the very generous Taylor Rule calculations he used in May to try to estimate the lower bound for monetary policy, which at the time was around 3.5%.

“Where the committee will come to this judgment of where you need to be to put significant downward pressure on inflation, I think that’s a key part of the political debate in the next couple of meetings,” he said. said Bullard.

Is there confidence in the Fed currently?

“I hear all the time and even hints from some governors and Fed officials who [tightening] doesn’t work yet, and they talk about kernel [CPI]”Monetary policy isn’t working on the core in five or six months. I think this pessimism about why Fed policy isn’t working is way over the top.”

Bullard opined that the federal conspiracy as well as policymakers’ belief that next year will be deflationary are strong arguments against the existence of pessimism in the markets. “It seems, on the contrary, that they are somehow too optimistic about the extent of disinflation that we will have.”

Instead of looking at what markets are pricing or dot charts, Bullard argued for using the two-year Treasury yield as a measure of both where policy rates are now and where they should be at. the future. Bullard believes that the current yield curve inversion is partly due to markets pricing in inflation in the short term but not in the medium term (nominal inversion), reflecting confidence in the ability of the Fed to lower inflation and the uniqueness of the current reversal.

“At the end of the day, to walk away from the technical discussions is that we are in restrictive territory. Some people say, ‘Oh, we’re not,’ but I think we are and definitely should be very, very soon — in a few months — in pretty restrictive territory,” Siegel concluded.

The pair also discussed the money supply, where Bullard hopes the Fed will be in a year, and housing in detail.

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