Folks are still talking about James Bullard’s big paper on how the US is at risk of becoming Japan, if we don’t quickly go into uber-dove mode.
Mike O’Rourke of BTIG has an interesting take.
When the Federal Reserve Bank President authors a paper with a title that sounds like a Stephen King novel, it is certainly going to garner some attention and rightfully so. “Seven Faces of ‘The Peril'” is the title of St. Louis Fed President James Bullard’s latest research. Bullard did not pull any punches in the abstract, he states “I emphasise two main conclusions: (1) The FOMC’s extended period language may be increasing the probability of a Japanese-style outcome for the U.S., and (2) on balance, the U.S. quantitative easing program offers the best tool to avoid such an outcome.” The importance of these statements is remarkable. This is a relatively new (2 years into the post) Regional Bank President producing research concluding that the current trajectory of FOMC policy may increase the likelihood of an outcome that we all know we don’t want. If you read between the lines, it sounds like he is really saying, “Ben, I think you are wrong, and now that I have called you out on it, if you don’t adjust policy you will be subject to very serious hindsight risk.” We are accustomed to hearing Richmond Fed President Jeff Lacker and Kansas City Fed President Thomas Hoenig dissent on FOMC policy all of the time, almost always simply in favour of being more hawkish, and usually provide some balance to the debate. Bullard appears to be staking out the ultra-dove ground with his conclusions. If we wind up in a Japan scenario, regardless of the cause, this research will be used to blame the Fed.
Meanwhile, this line is pretty great:
You have to give Bullard credit for creativity while remaining within the realm of reality. Simultaneously, we can imagine the German’s at the Bundesbank thinking this is heresy in the almost cavalier way Bullard talks about adding liquidity to the system. “We can double the monetary base one day, and return to the previous level the next day, and we should not expect such movements to have important implications for the price level in the economy. Base money can be removed from the banking system as easily as it can be added, so private sector expectations may remain unmoved by even large additions of base money to the banking system.”