The ‘Bullard’ PUT

My MINT column on Tuesday was arising out of my anger/frustration/disbelief at the comment by James Bullard, the President of the Federal Reserve Bank of St. Louis, that the Federal Reserve should reconsider ending its asset purchases in October. He made that comment in the middle of last week when the S&P 500 stock index had dropped a few percentage points from its ridiculously overvalued level. His comments were a pathetic admission of the well-known fact that the US monetary policy targets only one thing – asset prices. One thing we do not know for sure is whether Mr. Bullard was speaking on his own or if he was the voice of the Federal Reserve Board. Perhaps, the latter. See next paragraph.

A week  before Mr. Bullard spoke, Stanley Fischer, his Vice-Chairman, had said that weakness in foreign economies would influence the Federal Reserve to delay its monetary policy normalisation. Suddenly, the Federal Reserve had become sensitive to international consequences of its actions! I wrote in my column in MINT if it had anything to do with bailing out China. Unfortunately, for him, in a research piece, Goldman Sachs has noted that any slowdown in economic growth overseas should have negligible impact on US economic growth (‘Weak Global Growth Is Not a Big Threat to the US Recovery’, October 21, 2014). Not that TGS shares the optimism of the economists at Goldman Sachs with respect to the US economic growth outlook but all the same, their observation that foreign growth slowdown should not matter to the US exposes the hollowness of Mr. Fisher’s excuse to hold rates at low levels a bit longer, in the United States.

I was also disappointed to read a speech by my policy hero Andrew Haldane of the Bank of England in which he too held out the prospect of ‘lower for longer’ interest rates in the UK. When he was the Director in charge of Financial Stability, he usually said all the right things about the financial sector, financial markets, etc. Now, that he is the Chief Economist of the Bank of England and is a member of the Monetary Policy Committee, I wonder if he is constrained to or compelled to sing from  a different hymn book.

My consternation with James Bullard’s speech is shared here and here. The speech by Andrew Haldane and by Stan Fisher can be found here and here respectively.

I have a question: when commentators talk of poor quality of institutions in the developing world inhibiting sustainable economic growth, I wonder if they would apply the same logic to Western central banks and their respective countries.


2 thoughts on “The ‘Bullard’ PUT

  1. Hypothesis: Asset prices, in current times, are likely seen as the key transmission mechanisms through which changes in interest rates by Central Banks influence the real economy.

    If you fully believe in the above, I would think that talking up the markets could be an alright thing. But I fear that costs and benefits cannot be appropriately estimated and ultimately such things will likely lead to poor outcomes when experimentation has gone on for so long.


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