Here’s Bullard’s Problem With the Fed Policy Statement


Seen here: the average consumer deciding what to do with funny money.

Inflation was a growing concern before Wednesday’s FOMC monetary policy announcement. On June 18, the preceding Tuesday, The U.S. Bureau of Labor Statistics reported that the consumer price index increased just 0.1 percent on the month in May, slightly below expectations. The core index, which strips out typically volatile food and energy prices, increased 0.2 percent. On the year, the the CPI-U index was up 1.4 percent, slight ahead of the 1.1 percent advance registered in April.

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As Chairman of the U.S. Federal Reserve Ben Bernanke put it a few weeks ago in a testimony before Congress, “if anything, [inflation] is a little bit too low.” This, it turns out, may have been understating it.

The FOMC decided to leave policy unchanged at its last meeting, although Bernanke did elaborate on (if not muddle) Fed thinking in a post-meeting press conference that had the general effect of throwing global equity markets into turmoil. While there are a dozen things to get hung up on about Fed policy, forward guidance, and the current economic condition, inflation looks like it has taken the spotlight.

At the beginning of the year, the Fed set an inflation target of 2.0 percent, but the economy has since struggled to maintain upward pressure on prices. In his last testimony before Congress, Bernanke warned against incipient deflationary pressures and indicated that accomodative monetary policy has played a key role in offsetting the pressure. Inflation may be below target, but it could be worse, and it’s the Fed’s job to make sure it doesn’t get any worse.

St. Louis Fed President James Bullard was one of just two Federal Reserve board members who dissented to the most-recent FOMC monetary policy action (the other was Kansas Fed President Esther George). In the original statement, it was noted that Bullard “believed that the Committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings.”

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A statement issued by the St. Louis Fed on Friday elaborated: “Inflation in the U.S. has surprised on the downside during 2013. Measured as the percent change from one year earlier, the personal consumption expenditures headline inflation rate is running below 1 percent, and the PCE core inflation rate is close to 1 percent. President Bullard believes that to maintain credibility, the Committee must defend its inflation target when inflation is below target as well as when it is above target.”

U.S. Inflation Indicators 3

PCE data for May will be available on June 27, Source: Bureau of Labor Statistics

Alongside its policy statement, the Fed released relevant economic projections.

Fed board members are looking for PCE inflation to trend between 0.8 and 1.2 percent in 2013 before picking up steam. In 2014, expectations land in a range between 1.4 and 2.0 percent, the upper bound being the bank’s long-term target. To recap, the Fed set a 2.5 percent “threshold” (emphasis apparently necessary after Bernanke’s last press conference) as a criteria for a shift in interest rate guidance.

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Bernanke commented: “As I have noted frequently, the phrase “at least as long” in the Committee’s interest rate guidance is important; the economic conditions we have set out as preceding any future rate increase are thresholds, not triggers. For example, assuming that inflation is near our objective at that time, as expected, a decline in the unemployment rate to 6-1/2 percent would not lead automatically to an increase in the federal funds rate target, but rather would indicate only that it was appropriate for the Committee to consider whether the broader economic outlook justified such an increase.”


Source: Federal Open Market Committee projections

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