First of all, let’s dispense with any notion that the latest paper from Fed Governor James Bullard represents some kind of divergence within the central bank.
This was no accident, and a Fed governor doesn’t write such a mammoth, crucial piece when he’s going desperado.
You don’t need to understand much about monetary policy or technical jargon to get the gist of the paper, which is: WE ARE JAPAN.
The word “Japan” is on nearly every page of the paper, and the conclusion makes it all dead obvious:
The global economy continues to recover from the very sharp recession of 2008
and 2009. During the recovery, the U.S. economy is susceptible to negative
shocks which may dampen ináation expectations. This could possibly push
the economy into an unintended, low nominal interest rate steady state.
Escape from such an outcome is problematic. Of course, we can hope that
we do not encounter such shocks, and that further recovery turns out to be
robustó but hope is not a strategy. The U.S. is closer to a Japanese-style
outcome today than at any time in recent history.
In part, this uncomfortably close circumstance is due to the interest rate
policy being pursued by the FOMC. That policy is to keep the current pol-
icy rate close to zero, but in addition to promise to maintain the near-zero
interest rate policy for an ìextended period.î But it is even more than that,
because the reaction to a negative shock in the current environment is to
extend the extended period even furtheró delay the day of normalization
of the policy rate farther into the future. This certainly seems to be the
implication from recent events. When the European sovereign debt crisis
rattled global Önancial markets during the spring of 2010, it was a negative
shock to the global economy, and the private sector perception was certainly
that this would delay the date of U.S. policy rate normalization. One might
think that is a more ináationary policy, but TIPS-based measures of ináation
expectations over Öve and 10 years fell about 50 basis points.