St Louis Fedhead Bullard: Medium-term Inflation Risks are a Tad Worrisome


Medium-term inflation risks may be higher than many believe, Federal Reserve Bank of St. Louis President James Bullard said Sunday, warning that the U.S. economy’s output gap is being over emphasized.

“I am concerned about a popular narrative in use today — the narrative being that the output gap must be large since the recession is so severe,” Bullard told the National Association for Business Economics annual meeting. “And so, any medium-term inflation threat is negligible, even in the face of extraordinarily accommodative monetary policy. I think this narrative overplays the output gap story.” Bullard’s presentation, “Three Issues for Near-Term Monetary Policy,” is available here.

Bullard said measuring the output gap is difficult, and cautioned that traditional measures of the gap — the difference between the economy’s potential and actual gross domestic product — don’t account for the concept of bubbles.

In his presentation, Bullard also repeated his call for a new set of rules to guide the Fed’s asset purchase program because with interest rates currently at or near zero, the central bank’s ability to communicate the path of future policy is hindered.

The Fed’s $300 billion Treasury and $1.45 trillion mortgage-bond purchase program have dramatically expanded the size of the Fed’s balance sheet and has raised concerns of a potential surge in inflation as the economy recovers. The $1.45 trillion mortgage market program has been extended into the first quarter of 2010.

“This may lead to inflation in the medium-term, depending on markets’ expectations of monetary policy going forward,” Bullard said.

“Good policy means that the Fed needs to communicate to the private sector how it intends to react to shocks in the future,” Bullard said. “There has been little indication of how or whether these [asset purchase] amounts might be adjusted given incoming information on economic performance. This lack of clarity has created uncertainty in financial markets.”

Uh huh. What this means is that Bullard is in the "too chickenshit to pull the plug on the Fed funny money before it fucks everything up" camp.

Bullard gets a vote on the FOMC next year and Jr Deputy Accountant guesses here that his vote will be "ummm... well... uhhh..." because he lacks the technical cojones to get the Fed out of the mess it created. I'm not quite sure where to put Bullard on the JDA "Favorite Fedheads" list but I'm fairly certain he is closer to Janet Yellen than to Richard Fisher. Burn, dude!I mean, he's at least acknowledging it but... again, technical cojones here, kids, they will be quite important in the months ahead.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.