Bullard says Fed needs a new policy rule
James Bullard, president of the St. Louis Federal Reserve Bank, is worried about falling into a “trap” in which deflation remains a danger and interest rates remain low for an extended period of time. To avoid that trap, he said in a speech today in Switzerland, the Fed needs a new policy rule that makes clear how it’s going to respond to the situation. Here’s why:
In short, good policy means that the Fed needs to communicate to the private sector how it intends to react to shocks in the future. Before December 2008, the Fed was able to communicate future monetary policy because the likely path of interest rate adjustment was relatively well understood. With nominal interest rates currently at zero, the Fed has lost this ability to communicate future policy.
The Fed should consider a quantitative rule, one based on measurement of the money supply, Bullard says:
We have spent 20 years refining ideas about interest rate rules and optimal monetary policy. We should consider quantitative rules because we are at the zero bound and may remain there for some time, depending on how the economy performs. Quantitative rules are generally not as satisfactory as interest rate rules. But it is still worthwhile to use them because of the need to communicate future monetary policy to markets.
Bullard flashed plenty of mathematical equations at his audience, at a Swiss National Bank research conference. But this stuff has real-world implications, he emphasized, citing evidence that quantitative policy rules could have prevented both the Great Depression and Japan’s “lost decade” during the 1990s.
(5 votes, average: 2.4 out of 5)
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David Nicklaus has covered St. Louis business for more than 25 years. His column appears three days a week on the Post-Dispatch business page. 
If a tree falls in the forest, and no one was there……….did it make any sound?
The idea that deflation is a problem is fundamentally flawed. Deflation is a symptom of the problem of a reduction in aggregate demand, which usually results from a drop in the supply of money and people’s inclination to spend the money that they have. The correct policy response by the Federal Reserve is to increase the money supply, which is what they are doing when they keep short term interest rates low.
But the correct policy response by sellers (including people selling their services) is to drop their prices so as to encourage more sales and employment despite there being less money circulating. By definition, that is deflation, and it helps to sustain economic activity.
Hardly anybody complains when, say, the price of gasoline or natural gas drops, and thereby encourages more use of it, but somehow they think that whatever they are selling (including their services) should be immune from the corrective economic mechanism of price cutting.
Bring on the deflation then my raise this year might cover last years inflation. This guy is full of crap, the last thing we should worry about is deflation. The governments worried because they won’t be able to monitize the debt and borrow more money. Come on deflation, come to daddy. If you have saved money and didn’t get yourself into bad debt then deflation would be good.
Lest you forget the Democrats are in power again. That means easy money coupled with low unemployment. Monopolies will lose power, the market will once again be open to most participants. This time we do not want the Fed to slow economic growth because of rising wage costs. The best firms can and will pay this cost those that won’t risk legal action. The rising tide will lift most boats so to speak. Imports have been cut, Americans can have the best this country produces since exports have been cut also. So who is complaining the monopolists, the Imperialists, and those wanting to build empire on the backs of the downtrodden. Fair trade will ensure our standard of living firms that produce in American and sell in America stand to gain. Small family farmers will be secure from market manipulations. All is well for those wanting to earn gains.