The main paper at today’s US Monetary Policy Forum in New York, organised by the University of Chicago’s Booth business school, is about housing.
Written by Michael Feroli of JP Morgan, Ethan Harris of BoA Merrill Lynch, Amir Sufi of the Booth school, and Kenneth West of the University of Wisconsin, it’s a comprehensive breakdown of the channels through which the housing bust continues to affect the recovery and well worth a read. Not only for its assessment of the housing market, but also on the implications for policy. Read more
On a call with reporters this morning to discuss his new paper “Death of a Theory” (about which more later), James Bullard, president of the St Louis Fed, made some helpful comments about the new rate projections that the Fed will publish at its next meeting. I quoted him in support of rate forecasts in February last year which was well ahead of the game. Today he said: Read more
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Both of next week’s key events are on Monday. Read more
The Federal Open Market Committee meeting next Tuesday promises to be the most interesting for about 12 months, since the outcome is far from certain.
The recent slowdown in the US economy seems to have caused some members of the committee to soften their stance on monetary policy, and the markets have begun to speculate about a possible easing in policy. If this comes, it is likely to be very slight, since I doubt that the Fed has seen enough evidence yet to convince them that the economy is slowing in a dangerous way.
However, some members of the committee seem to be getting increasingly worried that the US may be about to fall into a deflationary trap, like the one which has affected Japan in the last decade. James Bullard, the president of the St Louis Fed, released a very interesting paper last week which analyses the Japanese precedent in some detail. Although he does not consider this the most likely development in the US, he does think that it is sufficiently probable to require contingency planning, in much the same way as the government might prepare for a terrorist attack which it hopes and expects will not happen. Read more
For an inflation hawk, James Bullard, the president of the St Louis Fed, has some radical views on what to do if the economy weakens and the Fed decides to ease policy further.
Today he argued forcefully in a research paper that the Fed should use asset purchases if it has to ease further because promising to keep rates lower for longer – one of the other options – increases the chance of Japan-style deflation. Let me try to explain why. This post is long, wonkish, and probably not 100% technically accurate.
This is the chart that Mr Bullard uses. Look at the two lines this way:
- The curved line is the central bank. If inflation is high, it raises interest rates by more than one-to-one, in order to bring inflation back to target.
- The dashed red line basically says that money and prices don’t change anything real. You may have higher inflation and higher nominal interest rates but the gap between the two – the real interest rate – stays the same. Read more
Most of our interview on Saturday with James Bullard, president of the St Louis Federal Reserve Bank, was focused on his stance on the financial reform bill, which he seems quite exercised about.
But left on the cutting room floor were some of his observations on last week’s meeting of the Federal Open Market Committee, which he attended. Read more
The Federal Reserve board members have argued that asset bubbles are hard to identify when they’re growing. In retrospect, though, St. Louis Fed president James Bullard is calling a bubble a bubble.
Asked by Fox Business News about the housing market recovery, Mr Bullard made clear he wasn’t holding his breath waiting for the market to pick back up.
We have too many houses, so I wouldn’t expect that to really boom on us.
Housing prices have “by and large” stabilised, he said. And even there, he hedged. Read more
I ran an interview with St Louis Fed president Jim Bullard in today’s FT. Here are a few of my takeaways from that discussion, in no particular order.
1. Bullard has an above-consensus forecast for growth in 2010 and sees unemployment as likely to come down by roughly a point and a half from its peak over the rest of the year - putting it in the 8.5 per cent to 9 per cent range at year end.
2. He thinks the Fed should wait for solid monthly job gains and a decline in the unemployment rate before starting to tighten policy – but that it need not wait for unemployment forecasts to converge to their natural rate. Read more