Last week’s jobs report demonstrated the ongoing strength of the U.S. economy and underscored the need for the Federal Reserve to rein in its stimulus efforts, a Fed official said Tuesday.
St. Louis Federal Reserve Bank President James Bullard said that Friday’s report, which showed a healthy gain of 943,000 jobs last month, means the economy is making sufficient progress to start reducing, or tapering, the Fed’s $120 billion in monthly bond purchases. Those purchases, which began last March during the pandemic recession, are intended to lower longer-term interest rates and bolster the economy.
“It’s not clear to me that we’re really doing anything useful here,” Bullard said about the bond buys.
Bullard’s comments echo other recent calls from inside and outside the Fed that the central bank should start dialing back its ultra-low interest rate policies. On Monday, Boston Federal Reserve Bank President Eric Rosengren told the AP the tapering should begin his fall. And last week, Fed Governor Richard Clarida said the economy would likely meet the Fed’s criteria for lifting interest rates by the end of 2022, an earlier timetable than the Fed’s policymaking committee has projected.
Bullard sketched an aggressive timeline for tapering, which he thinks should start soon and conclude as early as next spring. That would put the Fed in a position to potentially lift its short-term interest rate from nearly zero, if necessary, to keep inflation from worsening.
Bullard, who is not a voting member of the Fed’s 18-person policymaking committee this year, also said that many Fed officials are underestimating the economy’s pace of improvement, which has far outpaced the recovery from the 2009-2009 recession. The interview has been edited for length and clarity.
Q. Tell me a little more about your timetable for tapering bond purchases.
A. The pace of tapering could be fast enough to end the purchases by the end of the first quarter (in 2022). Now one thing that’s happening is that the committee set up a standard of substantial further progress for tapering, and ending the purchases of assets, but we set up another test, which was full recovery in the labor market. And that is getting a lot more tangible, I think. For instance, if you had job growth of 750,000 over the next eight months or so you’d be all the way back to the pre-pandemic level of jobs, so that’s only at the end of March, in 2022. So I just think people are a little bit off in how fast things are moving. These are very big numbers compared to what we’re used to in the U.S. economy, both on the inflation side and the jobs report side so, I think that the asset purchases are something that we can bring to a close now.
Q. Do you think people are focused too much on the last recession and how slowly the recovery from that preceded? Is there a danger of fighting the last war?
A. That’s totally what’s happening! In the entire monetary policy community, on the (Fed) committee and off the committee, everyone’s got these ideas in their head about the very slow pace of recovery after the global financial crisis in the U.S. And to be fair, it took years to get back to the pre-crisis level of employment. It took years for output to get back. And we didn’t have any inflation during the entire decade. But the situation has changed rapidly in the last five or six months here where the vaccines have come online. They’ve been very successful. You know, now we’ve got core inflation likely to come in at 3.5% this year. That’s as high as it’s been in 30 years.
Q. Regarding the delta variant, should the Fed pause and see how that affects the economy before making any changes to its policies?
A. Yeah, the economy has already had probably 16 months to adjust for the pandemic and what we have found is that firms are able to produce, households are able to consume and save, people are able to work. There are ways to run the economy even while the pandemic’s going on. I think that the committee should just go ahead and make a decision in September, because I don’t think the asset purchases part of the policy is dependent on the delta variant. The interest rate part of the policy—adjustments there are farther off in the future, you could delay that if this really turned into a major setback.
Q. Should the Fed worry much about meme stocks and cryptocurrencies and some of the other things that are often cited as evidence that market bubbles may be forming?
A. I think for individual stocks that seem to be trading in ways that are not consistent with fundamentals that’s maybe something you can brush off. But when you talk about the housing market being mispriced, that turned out to be a disaster in the mid-2000s. The whole point of asset purchases is to keep longer-term interest rates lower than they otherwise would be, in order to influence interest-sensitive sectors. And if there was ever an interest-sensitive sector, it’s housing. And so you’re getting this rapid increase in prices. I think you’ve also got an aspect of this where you’re freezing out new homebuyers and homebuyers that might be at the lower end of the income distribution, and they’re getting priced out of the market. So it’s not clear to me that we’re really doing anything useful here.
Q. Do you expect some of the current high levels of inflation to persist beyond this year?
A. If you talk to CEOs about what their pricing plans are, they seem to be very confident that they can pass on the increased input prices that they’re seeing onto their customers without any trouble at all. That dynamic certainly indicates that you’d have widespread price increases the remainder of this year and into 2022. That suggests to me that this will be a more persistent inflation shock than what is commonly being discussed in financial markets today. I want to just stress how out of position we are to actually put downward pressure on inflation, we’d have to be done with the asset purchases and then we’d have to raise the (Fed’s interest) rate to some level that would actually put downward pressure on inflation, and we’re not close to being able to do that if we had to. So that’s why I think it’s a little bit more urgency.