St. Louis Federal Reserve President James Bullard dissented from the FOMC statement that was issued Wednesday afternoon, and today he's out with a brilliant statement explaining what the Fed got wrong and, implicitly, why markets crashed yesterday.
The essence of it is that both measured inflation and inflation expectations had fallen in advance of the meeting, and the Fed didn't say or do anything about it. Ben Bernanke explained that he thought those disinflationary trends were due to transitory factors, which may well be correct. But had inflation poked above the Federal Reserve's target for any reason—even a transitory reason—the Fed would have been out there with bold signs to reassure everyone they were prepared to defend the target.
"President Bullard believes that to maintain credibility," he writes "the Committee must defend its inflation target when inflation is below target as well as when it is above target." Right on.
It's worth noting that Bullard has obtained a reputation as an inflation hawk in the Ben Bernanke era. I heard him speak a couple of times back in January at the American Economic Association conference and his words at that time struck me as badly confused. In retrospect, I think I underestimated him and what he was saying just sounded confused to me because I was expecting his reasoning to lead to a hawkish outcome. But it's clear that Bullard is just genuinely locked-in on the inflation question and is now a force for good in pushing the rest of the Fed to take the idea of a symmetrical target serious.
You can find Bullard's full statement below the fold:
ST. LOUIS—Federal Reserve Bank of St. Louis President James Bullard dissented with the Federal Open Market Committee decision announced on June 19, 2013. In his view, the Committee should have more strongly signaled its willingness to defend its inflation target of 2 percent in light of recent low inflation readings. 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 (PCE) 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.
President Bullard also felt that the Committee’s decision to authorize the Chairman to lay out a more elaborate plan for reducing the pace of asset purchases was inappropriately timed. The Committee was, through the Summary of Economic Projections process, marking down its assessment of both real GDP growth and inflation for 2013, and yet simultaneously announcing that less accommodative policy may be in store. President Bullard felt that a more prudent approach would be to wait for more tangible signs that the economy was strengthening and that inflation was on a path to return toward target before making such an announcement.
In addition, President Bullard felt that the Committee’s decision to authorize the Chairman to make an announcement of an approximate timeline for reducing the pace of asset purchases to zero was a step away from state-contingent monetary policy. President Bullard feels strongly that state-contingent monetary policy is best central bank practice, with clear support both from academic theory and from central bank experience over the last several decades. Policy actions should be undertaken to meet policy objectives, not calendar objectives.
While President Bullard found much to disagree with in this decision, he does feel that the Committee can conduct an appropriate and effective monetary policy going forward, and he looks forward to working with his colleagues to achieve this outcome.