{"id":8698,"date":"2013-06-20T13:18:24","date_gmt":"2013-06-20T17:18:24","guid":{"rendered":"http:\/\/www.multiplier-effect.org\/?p=8698"},"modified":"2013-06-21T11:43:19","modified_gmt":"2013-06-21T15:43:19","slug":"fed-tapering-and-bullards-dissent","status":"publish","type":"post","link":"https:\/\/blogs.bard.edu\/multiplier-effect\/fed-tapering-and-bullards-dissent\/","title":{"rendered":"Fed Tapering and Bullard’s Dissent"},"content":{"rendered":"

(Updated<\/strong>)<\/p>\n

Here’s what’s new from yesterday’s FOMC statement and Bernanke’s press conference:\u00a0 the Fed has indicated that asset purchases (QE) will end when unemployment hits 7 percent.\u00a0 (Note that that’s different from the point at which the Fed will begin considering raising short-term interest rates — previously linked to a threshold of 6.5 percent unemployment.)<\/p>\n

Commentators have pointed out that the Fed seems to be basing its expectations — that asset purchases will begin “tapering” this year and end by next year — on some fairly optimistic economic forecasts (this is a recurring issue<\/a>).\u00a0 There are also a lot of questions as to what’s motivating these signals of a less expansionary stance, given that inflation is too low <\/em>by the Fed’s own measure.\u00a0 “Frankly,” Yves Smith writes<\/a>, “the real issue seems to be that the Fed has gotten itchy about ending QE.\u00a0 Who knows why. It may be 1937 redux, that they\u2019ve gotten impatient with the length of time they\u2019ve been engaged in extraordinary measures.”<\/p>\n

Somewhat related to this post<\/a> on the Fed’s historic “reaction function,” here’s Tim Duy’s analysis<\/a>:<\/p>\n

Bernanke continued to deflect attention from the low inflation numbers, describing them as largely transitory, identifying the impact of the sequester on medical payments as a factor. \u00a0Here is what I think is going on: \u00a0Overall, the Fed has basically a Phillips Curve view of inflation. \u00a0Low inflation now is attributable to high unemployment. \u00a0Given that unemployment is forecast to fall, and the forecasts are improving such that it is falling faster than anticipated, they anticipate that disinflation will soon be halted. \u00a0In other words, right now policy is being driven by the unemployment rate<\/strong>. \u00a0The more quickly unemployment is moving to the Fed’s long run target, the more they will reduce accommodation despite low inflation. \u00a0At least, that is what it appears.<\/p><\/blockquote>\n

One interesting wrinkle is that James Bullard dissented from the near-unanimous decision.\u00a0 According to the official FOMC statement<\/a>, he “believed that the Committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings.”<\/p>\n

Normally, you would think of Bullard as a “hawk” (this dove–hawk framework seems to have become less useful in the era of unconventional monetary policy).\u00a0 In his April speech at the Minsky conference, Bullard warned against unemployment targeting and suggested the Fed ought to focus primarily on price stability (price-level targeting).\u00a0 The cynic might dismiss this as just a convenient technical excuse for ignoring high unemployment, but Bullard’s dissent suggests that he takes the model quite seriously — which is to say, not just when inflation is above<\/em> or near the target.\u00a0 If you want more insight into what might be motivating his vote, here’s the full speech:<\/p>\n