The Federal Reserve: Recent History & Monetary Policy with Former St. Louis Fed President James Bullard

Jon Hartley and James Bullard discuss Bullard’s career in monetary policy, the history of the St. Louis Fed, serving on the FOMC during the Bernanke, Yellen and Powell Feds, inflation targeting, forward guidance, macroeconomic modeling, as well as how the Fed responded to the Great Recession, COVID-19, and the early 2020s inflation.

Recorded on November 4, 2024.

ABOUT THE SPEAKERS:

James “Jim” Bullard is a macroeconomist and was president of the Federal Reserve Bank of St. Louis from 2008-2023. In 2023, he became the inaugural dean of the reimagined Mitchell E. Daniels, Jr. School of Business at Purdue University. He also serves as special advisor to the president of the university, reporting to President Mung Chiang in that capacity. Bullard is also a distinguished professor of service and professor of economics in the Daniels School.

Before becoming president, Bullard served in various roles at the St. Louis Fed, starting in 1990 as an economist in the research division and later serving as vice president and deputy director of research for monetary analysis. 

Born in Wisconsin, Bullard grew up in Forest Lake, Minnesota, and received his doctorate in economics from Indiana University in Bloomington. He holds Bachelor of Science degrees in economics and in quantitative methods and information systems from St. Cloud State University in St. Cloud, Minnesota.

Jon Hartley is a Research Assistant at the Hoover Institution and an economics PhD Candidate at Stanford University, where he specializes in finance, labor economics, and macroeconomics. He is also currently a Research Fellow at the Foundation for Research on Equal Opportunity (FREOPP) and a Senior Fellow at the Macdonald-Laurier Institute. Jon is also a member of the Canadian Group of Economists, and serves as chair of the Economic Club of Miami.

Jon has previously worked at Goldman Sachs Asset Management as well as in various policy roles at the World Bank, IMF, Committee on Capital Markets Regulation, US Congress Joint Economic Committee, the Federal Reserve Bank of New York, the Federal Reserve Bank of Chicago, and the Bank of Canada. 

Jon has also been a regular economics contributor for National Review Online, Forbes, and The Huffington Post and has contributed to The Wall Street Journal, The New York Times, USA Today, Globe and Mail, National Post, and 
thinking.
He would certainly take it on board ordismiss it as he saw fit.
So I think once thatdemocratization took place,
then that was inherited byChair Yellen and Chair Powell.

(00:46):
So it's really the same way today.
I don't think you could run it the sameway Greenspan ran it in the current
environment.
I think it's a differentkind of committee today.
[MUSIC]

>> Jon Hartley (01:08):
This is the Capitalism and Freedom the 21st Century podcast,
an official podcast of the HooverInstitution Economic Policy Working Group
where we talk about economics,markets and public policy.
I'm Jon Hartley, your host.
Today my guest is James (Jim) Bullard,
who is the dean of the Mitch DanielsSchool of Business at Purdue University.
Jim previously was the 12th presidentof the Federal Reserve bank of St.

(01:29):
Louis, a position heheld from 2008 till 2023.
Welcome, Jim.

>> James Bullard (01:34):
Glad to be here.
Thanks for having me.

>> Jon Hartley (01:37):
Well, thanks so much for joining us, Jim.
You're a Midwest guy, you were born inWisconsin, but you grew up in Minnesota.
You did your BA at St. Cloud Universityand your PhD at Indiana University.
How did you first getinterested in economics?

>> James Bullard (01:51):
When I was young, I had the vision of doing a sort of
computer science pluseconomics as an undergrad,
and that is my undergraduate degree.
And I would say my careerhas kind of worked out.
So I must have had rationalexpectations when I was young.

(02:13):
But a lot of the work that I'vedone over the years in economics
has been algorithms,solving macroeconomic models,
talking about how expectationsaffect macroeconomics.
And a lot of that has hadcomputational intensity to it.

(02:33):
So it did turn out to be a combinationof operations research or
computer science plus economics.
So that was the original vision.
And then I went to graduate school andthe rest is history.

>> Jon Hartley (02:49):
Well, it's amazing.
Well, I feel like you're certainly,I'm sure, in the Midwest during
the rational expectationsrevolution when that was going on.
Certainly I think that pervaded a lot ofthose so-called freshwater departments.
And Indiana as well,you had a lot of folks from,
from the Federal Reserve System.

(03:09):
I know Chris Waller wasa professor there at one point.
I'm just curious, so you've had a long andquite amazing career in
the Federal Reserve System andspecifically at the St. Louis Fed.
Before becoming president of the St.
Louis Fed, you were the deputy researchdirector there for many years.

(03:31):
What is it like being a deputy researchdirector at a regional Fed bank?

>> James Bullard (03:37):
Well, I loved it, I love my whole tenure in the Fed, but
I especially loved beingon the research staff.
We had a great research departmentwith a long tradition dating way back
was really the first researchdepartment to do academic style
research in the Federal Reserve System.
And I was coming alongmuch later than that.

(03:59):
But then in addition we were able to buildup the department even further as we,
after I became president, Chris Waller wasthe research director for about a decade.
So we had a, we really had a great run.
And I thought, you know, I just learned so
much economics from beingat sort of a crossroads.

(04:23):
I would say a lot of the Federal Reservebanks with strong research
departments like St. Louis are placeswhere you pretty much see, sooner or
later you pretty much see everybody who'sdoing something that's anywhere related
to monetary policy or macroeconomics,which means most of macroeconomics.

(04:45):
So I think it was a great chanceto have colleagues that were
interested in these issues andto be able to see all, you know,
have a bird's eye view of all the workthat was going on in the field.

>> Jon Hartley (04:59):
I mean, the St Louis Fed, I feel like known for many things.
One, it's known forbeing the home of Fred,
which is how a lot of people downloadtheir macro time series now.
And it's a great database full of tonsof macro time series that anybody can
access for free.
I feel like that's one really understated,incredible contribution from the St.

(05:25):
Louis Fed andthe Federal Reserve System in general.
I guess you also had this other sort ofpart of the St. Louis Fed where I think
it's just very well known forbeing very good on economic history.
And I know it's got it's Fraser database,it's got a bunch of things.
I mean, it's also sort of got thislink to monetarist economics,

(05:46):
old monetarist sort of economics.
I don't know if maybe Milton Friedmanvisited and I'm curious or
maybe there were a lot of Milton Friedmanstudents who had migrated to the St.
Louis Fed over time.
I'm curious, what is the historybehind the St. Louis Fed?

>> James Bullard (06:01):
Yeah, well, a guy named Homer Jones was hired in 1958.
Homer Jones was at Rutgers whenMilton Friedman was a student there.
And then they became long,long time friends within economics.
And so later Homer Jones came to the St.

(06:22):
Louis Fed andMilton Friedman was at Chicago.
So that's how the monetaristaspect of it got going.
But I think it was moreattitude that these were very
difficult problems tounderstand the economy and
understand monetary policyin a scientific sense.

(06:44):
And so you're gonna have to get seriousabout from a research angle and
you're gonna have to rollup your sleeves and dig in.
And that's very much whatthey did at that time in that
through the 1960s andinto the early 1970s.
And so that kind of establishedthe reputation of St. Louis Fed.

(07:04):
But we're many years beyond that now.
What I wanted to do aspresident is build on that.
Not claim that everything thatthey said was exactly right, but
try to build on that and
especially to carry forward the attitudethat these are hard problems and
they take a lot of work to try to solvethem and you can only make a certain

(07:27):
amount of progress on any given daybecause they're that difficult.

>> Jon Hartley (07:33):
Yeah, it's fascinating.
I mean, the history there is,I think, quite interesting,
and worth thinking about looking into.
I'm curious, so you became presidentof the St. Louis Fed in 2008.
I mean, tell us,what is the selection process like for
becoming a regional Fed bank president?
I know, I think the outgoing director orthe outgoing president of that given

(07:54):
regional Fed, I think, submits a few namesto the regional Fed bank board, I think.
I think people that are less familiar withhow the Federal Reserve System works.
You have these 12 regional banks inaddition to the Federal Reserve Board.
The Federal Reserve board is in D.C. but
each of these regional Fed banks is kindof like a quasi governmental institution.

(08:18):
They have their own board of directors,and
those boards of directorsare responsible for
choosing the president ofthat regional Fed bank.
Now, like,what directors can actually choose and
be part of that process has changeda little bit since Dodd Frank.

(08:41):
The banking, class A directorscan't vote on presidents anymore.
But I'm curious,what is that whole process like?
And of course, these names I think,
have to be approved bythe Federal Reserve Board.
And I think over time,
the Federal Board has maybe playeda greater role in more recent years.
But I'm curious,going through that process,
as somebody who's actually interviewing tobecome a new regional Fed bank president,

(09:05):
what is that whole process like?
And who do you talk to?
And, and like.

>> James Bullard (09:09):
Yeah, you're right.
Each of the banks hasa board of directors, and
these directors are business and
banking leaders from acrossthat particular district.
And we had some great directorsthat really did a great job for

(09:31):
us while I was president of the bank andreally helped us a lot.
But when it comes timeto choose a new leader,
it's really up to the boardto choose that new leader.
Typically, they'll hire a recruiting firm.
They'll try to have a broad search,certainly a nationwide search,

(09:53):
and then they try to makea good judgment about
somebody that can bea leader in monetary policy,
but also be a leader forthe bank and manage the bank.
I mean, the St Louis Fed, when I left,is right around 1500 employees and

(10:13):
had plenty of work to do otherthan just the monetary policy and
the research department.
So there's quite a lot tomanage at a high level.
And the board of directors takesthis job very seriously in
trying to find somebody that canplay both roles effectively.

(10:35):
I would say that forSt Louis in particular, I think the notion
of carrying on the researchtradition is very prominent.
And I'm sure that weighed on the boardof directors when they replaced me.
But one of the things that happened afterHomer Jones and Milton Friedman, which

(10:57):
is in the distant past, but the otherbanks then copied St Louis because St.
Louis had a lot of success and theycreated their own research department.
So Minneapolis is one ofthe most famous ones.
They had Tom Sargent visiting andEd Prescott later,
and Chris Sims,all of whom won Nobel Prizes.

(11:20):
So Minneapolis, I would say,sort of copied the St Louis model.
And then later all these other banksalso produced powerful research
department, San Francisco,Chicago, and many others.
So I think.>> Jon Hartley: [INAUDIBLE] Richmond, Fed.
Yeah, Richmond, really all of them are pretty good right now.

(11:43):
So now I think what you have isthis very good research system
across the Fed where the differentbanks can provide sort
of independent input onthese important questions.
They come from different research anglesand they might have different data,
they might have different ideas.

(12:03):
And that joint process Ithink leads to very good
leadership on the part of the Fed forintellectually,
for pursuing great policy forthe United States.

>> Jon Hartley (12:18):
I think that the whole Federal Reserve System has changed quite
a bit over time in the sense that, one,
they become the largest employer,I think of PhD economists.
You have a couple hundred PhD economistsat the Federal Reserve Board and
hundreds, hundreds morethroughout the system.

(12:40):
But you know,
it wasn't always the case that the FederalReserve was run by PhD economists.
I think in the earlier partof the 20th century, and
maybe even through the middle of it,it was largely run by lawyers and bankers.
And it's interesting howthe number of PhDs I think might
have even peaked 10 or 15 years ago.

(13:02):
And I think now there's fewer PhDs onthe FOMC today than perhaps there was 10,
15 years ago.
So I know there's always this struggle,I think, between PhD economists and
lawyers in terms of vying forthese sorts of economic policy positions.
But I'm just curious,as a regional Fed bank president,

(13:25):
what is the routine like in terms ofyour interactions with the chair and
the fed board in D.C alongwith other FOMC members?
You're president of the St Louis Fedalongside three different chairs,
Bernanke, Yellen, and Powell.
And you're also staff underthe Greenspan Fed and

(13:47):
you were going to FOMC meetingsin the Greenspan Fed era?
I mean, did their styles changeover time or with different chairs?
Have styles changed quitea bit on the FOMC in
terms of deference to other FOMC members?
I mean, my understanding is thatGreenspan kinda just moved and

(14:08):
everybody sort of was prodded to kind offollow alongside what Greenspan wanted.
Whereas my understanding is over timeI think it's become a little bit
more democratic anddeferential to different FOMC members.
But when you go to thesemeetings every six weeks, I mean,
my understanding is that some chairs havehad, have made more of an effort to have

(14:30):
one on one meetings with regional Fed bankpresidents before the actual meetings
happen I'm curious what is that experiencelike as a regional Fed bank president?

>> James Bullard (14:40):
Yeah, I think [COUGH] the best way to understand it is that
Greenspan was an imperial chair so hevery much saw himself as the decider and
the others as maybe weak advisors andthat was very much the style.
He would give his ideasabout what should happen

(15:03):
at the meeting he would give that first.
I think there was less emphasis onthe future path of policy in the 90s and
early 2000s than there would be today sothat's been a major change.
[INAUDIBLE] Yeah, definitely, verylimited or almost no forward guidance.

(15:28):
I think toward the end of his term,Greenspan,
started experimenting somewhat butvery carefully with forward guidance.
And then I would say thata major change occurred
with Ben Bernanke becoming governor and
later becoming chair becauseBernanke was a democratizer.

(15:49):
He wanted the committeeto provide input and
I think the best way to understandChair Bernanke is that.
You know, no one is more intellectuallysecure than the Nobel Prize winning chair.
So he wanted input, he wanted to hearwhat different people had to say and

(16:10):
he didn't, it didn't bother him if theysaid something that was counter to what
he was thinking.
He would certainly take it on board ordismiss it as he saw fit.
So I think once thatdemocratization took place,
then that was inherited byChair Yellen and Chair Powell.

(16:33):
So it's really the same way today.
I don't think you could run it the sameway Greenspan ran it in the current
environment.
I think it's a differentkind of committee today.
And I also think that.
So the other thing about Bernankeis it's all about transparency.
And really the transparency revolutionthat got started a little bit under

(16:55):
Greenspan really came tothe fore under Bernanke.
And this means that the public and
the global financial markets hear muchmore about what the debate is among
members of the committee becausecommittee members are talking pretty
much all the time about how they'reinterpreting the most recent data,

(17:16):
what they think about the futurepath of policy and all these things.
I've said that I think that'sa fantastic thing because markets
want to know what'sthe committee thinking.
And what better way to do that thanjust have people doing interviews and
various kinds of speeches andreacting to the latest data and

(17:39):
shading their positions subtly in onedirection or another on any given day.
So I think there's a lot more informationout there and I think that creates
better policy as opposed to globalfinancial markets having to guess,
do seven people think this or do fivepeople think that are on the committee?

(17:59):
They pretty much tell youin their speeches and
in their interviews where they're at andhow they're interpreting the last data.
And you can get a very good read on thecommittee most of the time through that
process.

>> Jon Hartley (18:11):
Yeah, and it's fascinating too.
I mean over that time periodunder the Bernanke, Fed,
you had things likethe introduction of the SEP for
guidance famous dot plots ofwhere all the committee members
forecast various macroeconomicvariables like inflation,

(18:31):
unemployment, butalso where they forecast their own
interest rate reaction function to be,I guess.

>> James Bullard (18:39):
I mean the dot plot would have been considered absolutely
outrageous in the Greenspan era, but
came to be accepted as a kindof standard not just at the Fed,
but even more so at some ofthe other central banks that did,
in bank of England in particularpublished an inflation report

(19:01):
ECB has a regular forecast round andpublishes all that material.
So I think that kind of thing didnot occur certainly under Greenspan,
but that's part ofthe transparency revolution.

>> Jon Hartley (19:16):
Absolutely, and
even declaring that the Fedhas a 12% inflation target,
even though it's arguably somethingthat tacitly happened in the 1990s and
2000s when all these other centralbanks started explicitly announcing
various inflation targets, starting withthe Reserve bank of New Zealand, and they

(19:36):
famously came up the first central bankto declare their targeting 2% inflation.
And I think the bank of Canada andothers followed quickly thereafter.
But the Federal Reservedidn't officially or
formally announce its2% target until 2012.
I mean, what were those discussions likein terms of that sort of transparency and

(19:58):
officially adopting something that'spretty critical to the overall framework?

>> James Bullard (20:03):
Yeah, I think inflation targeting really,
as you just outlined,started in the early 1990s,
but I think it was really the runup to the establishment of
the ECB in 1998, 1999 andthe years ahead of that,
where an inflation target was talkedabout in Europe at length and

(20:27):
finally decided to be famously 2% orless as the inflation target.
But that's a major central bank.
The Fed didn't join immediately,but I think implicitly did join
all through the 2000 andfinally named a target in 2012.
Now Greenspan opposed inflation target.

(20:54):
He said he wanted flexibility.
But that runs counter to whatthe literature was saying.
The literature was saying exactlythat you had to commit and so
that markets knew what your target was,where you were heading,
as opposed to the Greenspan notion thatyou didn't wanna tell them where you
were heading cuz you might wannago in a different direction.

(21:14):
But that idea has passed its prime and
it's all about commitmentto the target now.
And Chairman Bernanke wantedto establish a target.
He said so when he took the chair, but
he didn't find the right momentto do it until 2011, 2012.

(21:36):
And we worked on that during 2011,
a group of presidentstried to draft a statement
that would be a way toestablish an inflation target.
And that statement got vettedwith other presidents and
eventually by Bernanke andby the Board of Governors.

(21:59):
And that became in January 2012,the statement of long run.
I forgot what it's called,long run objectives or
long run goals of the committee.
And, and that's the one thatthe committee will be revisiting
here this year or next year,I guess next year.

(22:19):
And that's the one thatestablished inflation targets.
So I think that was an importantdevelopment for the US and
also informed decision makingbetween 2009 and 2019,
when inflation was actually belowthe target, as opposed to being above,
which is where we usuallywere in the earlier era.

>> Jon Hartley (22:42):
And since, yeah, I feel like the Fed's framework has evolved even
further than that in more recent years.
You have the flexible averageinflation targeting framework
review under Rich Clarita'stenure as vice chair.
He played, I think,a pretty important role in that.

(23:03):
I mean, you were president ofthe St Louis Fed during some very
consequential economic times.
The Great Recession andthe aftermath of it,
as well as the COVID 19 pandemic andits aftermath.
How did these episodesshape your thinking and
what do you think the Feddid well over this period?
What do you think the Fed should havedone differently over this period?

>> James Bullard (23:27):
Yeah, I'd say the global financial crisis
was an unmitigated global disaster and
it started on in US Financial markets.
That's what was disconcerting about it.
But not in the US Banking sector,really, the US shadow banking sector.

(23:49):
And it was clear that we had a long way togo to provide better financial stability.
But I do that FED reacted.
Well to that and has better radartoday than we once would have
had about potential forfinancial instability to develop.

(24:10):
So I think that was a plus.
I think the other thingthat this brought up,
the recovery from the global financialcrisis was so slow and took so long.
That I think it raised a lot of questionsabout how to conduct monetary policy in
an environment of extremely low inflation,extremely low nominal interest rates.

(24:36):
I think we have a mixed recordactually on being able to stimulate
the economy all that well during that era.
And we tried many different things,but it was okay.
I think it was moderately successful, butit was certainly not a brilliant success.

(24:56):
And finally, the pandemic came along.
I think the pandemic wassuch a big shock and
a global shock that it was enough toknock us out of that equilibrium and
into a new one,which I think is where we are today.
And this got me thinking a lotabout regime switching as a way to

(25:17):
think about what happened between 2009 and2019.
That there are two possibilities,at least, for
the medium term outcomesin the US economy.
One is a very low nominal interest rate,low inflation equilibrium.
And another is a more normal, orwhat I would think of as a more

(25:38):
normal equilibrium,with a higher real interest rate,
higher nominal interest rates,and faster growth probably.
And I think that's a major challengeis to be able to think about
what makes you switch betweenthese two possibilities.

(25:59):
And how can you conduct monetarypolicy knowing that those two
possibilities are out there?
But for now, I think we have probablybeen knocked out of the very low
nominal interest rate equilibrium.
And now, I think the better comparisonsare to the period from 2000 to 2007 or

(26:21):
the period from, let's say, 1995 to 2000.
I think those are better models forwhat could happen in the US
economy now as opposed tothe 2009 to 2019 period.

>> Jon Hartley (26:36):
So I just want, I guess,
maybe lightning around justa few questions just in general.
And I mean, you've had such an amazing and
very long tenure on the FOMC andyou've seen so many things.
So I'm just curious that there are fewgeneral thoughts on a few different
things.
So one, you're going back to,I guess, the 2010s.

(27:01):
There was this introduction of what onewould call Delphic forward guidance,
the SEP.
I mean, this is sort of yougive contingent forecasts and
contingent policy projections.
Was that a good addition in your mind or
one that I think onethat should be revisited?

(27:21):
I know there have been somecritics saying that the regional
Fed Bank presidents shouldactually be owning their dot.
And rather than sort of keeping ita secret or maybe adding confidence
bands around projections, I think thatwas a Laura Adam Ester suggestion.

(27:42):
Given that there's uncertainty withall these sorts of forecasts of GDP,
unemployment, inflation, andthe future path of policy.
Was the addition of Delphicforward guidance, like the SEP,
sort of overall goodaddition in your mind?

>> James Bullard (27:59):
Generally speaking, I think it was a good addition, but
as you may know, I've actuallythought about, well, as president,
to actually drop out of the dot plot.
[COUGH] Because I think thereare some inherent problems with it
that just have not, the committeehas just not been able to deal with.

(28:21):
So I guess my assessment is thatthe dot plot was introduced
fairly quickly over a period ofmaybe two or three meetings.
And I think the view was that, okay,
if this doesn't work exactly right,we can make changes in the future.
But instead, it got frozen into place,and so now you have this.

(28:43):
The dots are not connected,as you just pointed out.
You can't tell which dot goes with whichother dot for some other variable.
I think the horizons are weird,
you've got the horizon shorteningas you go through the year so
that the September meeting in particularonly has a horizon of about 90 days.

(29:06):
So you're basically sayingexactly what you think should
happen at the next two meetings.
I've always thought that was fraught for
the committee if the datadoesn't cooperate.
And sometimes the datadidn't cooperate and
the committee got into troubleat the December meeting.
So I think that's awkward,but all of this,
the main thing I would say about thisis all of this could be done better.

(29:31):
You could just have a quarterlymonetary policy report and
you just put out a forecast in thatreport, probably a staff forecast.
And then let members of the committee saywhich parts of that forecast they agree
with or don't agree with.
That would allow for
a more fulsome discussion of everythingthat's affecting the economy.

(29:54):
It could be 30 or
40 pages instead of this crypticcouple of graphs that we put out now.
So I just think a lot could be done here.
I think the committee's been frozenin place a little bit around this.
It's probably better tohave the dot plot than not.
The other thing about it isthat not to ramble on too long,

(30:18):
but another thing aboutit is that the statement
of the committee is actuallya product of the committee.
So the committee has talked about this,and you alluded to this earlier.
But the chair does go around andtalk to everybody ahead of the meeting,
which I think was a great innovation andmakes a lot of sense.

(30:40):
It's a big, complicated meeting,
you can't come into the meeting notknowing quite what's gonna happen.
You have to have a pretty goodidea about what's gonna happen.
And I think that it helps that the chaircan round up opinions ahead of time.
But some that statement is a product ofthe committee, whereas the dot plot is

(31:00):
a product of independent assessmentsthat really isn't coordinated at all.
So sometimes the dot plot doesn'ttell the same story as the statement.
And then the chair is in a position ofhaving to play down the dot plot or
sometimes play up the dot plot,and this confuses markets.

(31:21):
So I think that's been a source ofsort of miscommunication at points.
And you really don't know what the dotplot is going to look like till
the Friday before the meeting, so thechair doesn't have that great of an idea.
So sometimes it has tobe managed a little bit.

(31:42):
I mean, it can all be done, but it couldprobably all be done a little bit better.

>> Jon Hartley (31:46):
Any thoughts on the Evans rule, Odyssey and forward guidance?
I mean, early on in the Great Recession,I think the Fed was really
struggling with trying to pushDown forward interest rates.
And so you're really trying to getthe Fed futures curve down several

(32:07):
years out of the curve was somethingthat the Fed was trying to do and
I think was strugglingwith in various ways.
I think it was sort of trying thingslike quantitative easing which I
think did move maybe the 10 yearrate by 10 basis points or so.
But the Fed was trying to domore in terms of rather than

(32:29):
just simply buying long term bonds.
I think trying to signal that the futurepath of the Fed funds rate or
the short term interest rate will be lowfor a very much longer period of time.
And that's kind of where some of thisforward guidance SEP projections came in.
But then there was also this move tointroduce odyssean forward guidance

(32:50):
which was time actually committing toa specific path based on some conditions.
So for those that aren'tfamiliar with what the so
called Evans rule was this idea thatwas sort of announced I think in 2013.
That announced by the Fed that it wouldnot raise interest rates from the zero

(33:10):
lower bound, the short term interestrate from the zero lower bound.
Unless unemployment fell I thinkbelow six and a half percent or
inflation went above I think maybe two anda half percent.
And I know around that time and maybe itwasn't a direct result of the Evans rule.
But I know that I think in 2013maybe it was the August meeting

(33:33):
that there was just a big effect onactually moving the forward part
of the Fed funds futures curve down.
And I'm curious,
I mean are you a fan of the Evans ruletype of odyssean forward guidance?
Is that something that you would be infavor of bringing back again in sort
of another post great recession, prolongedrecession, a slow recovery type scenario?

>> James Bullard (33:58):
Yeah, I would say the Evans Rule is a form of state contingent
forward guidance which I think is good.
The committee has struggled andcontinues to struggle with date dependent
forward guidance versus statedependent forward guidance.
So I think the natural instinct of many

(34:20):
is to want to give specific dates.
We won't do anything till March or
we won't do anything till January orsomething like that.
And we really got in trouble in August2011 where Chair Bernanke came into
the meeting and it's in the transcripts.
And I think the first thing he saidwas we're gonna have to do something

(34:43):
different.
So I'm going to propose that wepromised not to raise rates until 2013.
And that was a date contingent signal andnot a,
that's saying that no matter what happensin the economy I'm not gonna do this.
And I think that that's completely atodds with what any model will tell you.

(35:07):
The model will tell you thatyou're trying to control
a system with your get the best outcomesthat you can with your control variable.
You're going to have to react prettymuch continuously to the data
that are coming in the same way that youwould with a steering wheel on a car.
You wouldn't say, I'm not going to turn.
No matter what the road brings me,I'm not going to turn.

(35:29):
That's going to put you in the ditch.
So you're always reactingto changing conditions and
that's gotta be the spiritof monetary policy as well.
And I struggled to getthe community to get away from
the instinct to want toprovide date certain guidance.

(35:49):
Markets tend to want the date certainguidance because they want to focus
on other things that they'retrying to do in financial markets.
But I think good policy suggeststhat you can't give it to them, so
you should give them onlystate dependent guidance.
And it hasn't helped thatthe committee is unable to write down

(36:10):
a state contingent policyrule like a Taylor rule.
Or some cousin of the Taylor rule thatthey'd be willing to think about and
commit to.
And sobecause they haven't been able to do that,
you sometimes get date basedthinking comes to take advantage

(36:30):
of the committee andsometimes causes problems.
I think another case inpoint was June 2013.
I just entered at that meeting,that's the Taper Tantrum meeting.
So there I think the notionwas that the committee
was going to back off itsunlimited quantitative

(36:55):
easing even though the stateof the economy was
actually not consistentwith that at that date.
So that came off as extremelyhawkish in global financial markets.
And real interest rates went up100 basis points over the summer.
So it really can be quite dramatic,these effects.

(37:20):
And I think this is something that is very
much a live issue forthe FOMC going forward.

>> Jon Hartley (37:31):
So state contingent for
guidance over timecontingent- [CROSSTALK].
Okay, so I'm very bad with runninga lightning round here, but
I'll try it again.

>> James Bullard (37:42):
[LAUGH] >> Jon Hartley
all->> James Bullard: Sorry,
I'm rambling on too much.

>> Jon Hartley (37:45):
No, these are all prescient questions and
I feel like a lot of these deserveactually merit longer explanations and
responses cuz they're complicated.
So flexible average inflation targeting,
the idea that is sort ofthe Clarita kind of vice chair.
Idea that we should be averaginginflation over a longer period of time,

(38:08):
not just trying to hit 2% year over year.
But that there should bemaybe some look back window.
And of course, this was all introducedwell before the early 2020s inflation.
And the idea is, some have said itshould be an asymmetric type of target.
And the idea was at some level to allowfor some overrunning of 2% at the time,

(38:31):
and here's good idea orbad idea, should it be scrapped.
There's a lot of critics of it.

>> James Bullard (38:39):
Yeah, I think the core issue is if you want to conduct monetary
policy and inflation is generallypretty close to target or above target.
We have most of the research in the last25 years has been devoted to that case.
And in that case, I think it's fine.

(39:01):
You say, well, depending on howthe real economy is performing,
depending on where inflation is, youcould probably come up with a setting for
the policy rate that would be appropriate.
And in a lot of models thatwould even be optimal policy.
The question is when you get toa very low interest rate economy
with very low nominal interest rates,even negative nominal

(39:25):
interest rates, which we had in Europe andaround the world.
That some huge fraction of governmentdebt issued between 2009 and
2019 ended up being negativenominal interest rates,
unheard of before this all happened.
When you're in that kind of situation,

(39:46):
you can't lower the policyrate any further.
So you're doing these other types ofpolicy with questionable effects.
And so it's not.
Clear that you can get backto your inflation target.
And you just get stuck at an equilibriumas closer to 0% inflation
than it is to 2% inflation.

(40:07):
Is that a problem?
And that's maybe the first question.
And then the second question, if it is,
it's certainly a problem in the sense thatyou're not hitting your inflation target.
So just from a credibility point of view,it's not very good and
you're not providing the stability aboutnominal income that you'd like to provide.

(40:27):
So how to conduct monetary policy in thatcircumstance, I think that's the question.
And this flexible averageinflation targeting was
definitely designed withthat scenario in mind.
And I think the committeestill has to say, and
all central banks still haveto say to be really good.

(40:47):
They have to say what wouldthey do in that situation?
And then if it's high inflation,
then we'll consult the playbook thatwe inherited from Paul Volcker and
we'll raise interest rates sharply andwe'll get inflation to come down.
That happened just in 2022 up until now.
And so all of that seems to work fine.

(41:09):
The question is what do youdo in this other situation?
Or how do you stay out of that situation?
That's another good questionto continue to ask.
So we've got ways to go on these issues.

>> Jon Hartley (41:23):
Speaking of the early 2020 inflation, this is my next question.
We got this big inflationary spurt inMay of 2021, April, May, June 2021.
And at first it seemed tobe just used car prices.
By October it was pretty clear,it was pretty broad based,
hitting housing and a bunch of otherareas in the consumer price basket.

(41:46):
But the Fed didn't ultimatelystart raising interest
rates until March of 2022.
Should the Fed have started to raiseinterest rates earlier in your opinion and
was like so called team Transitory wrong?

>> James Bullard (42:02):
Yeah, well, Team Transitory was definitely wrong.
So I think we did do thingsin the second half of 2021
that I think were a tighteningof monetary policy, but
they don't show up as actualincrease in the policy rate.
What happened was that as of let's say,July 1, 2021,

(42:27):
the horizon for how long we wouldcontinue quantitative easing and
how long we would keep the interestrate at 0 was incredibly long.
It was like because the committeewas expecting the recovery from
the pandemic to look likethe previous recovery in 2009-2019.

(42:49):
So that one took 10 years.
And so they were kind of thinking, orwe were kind of thinking that that would
be you know, that's the template forthe post pandemic economy.
Now, if you look at it today,there's probably nothing so
V shaped in all of macroeconomics aswhat happened after the pandemic.

(43:10):
And so that kind of mentality,
which was that very slow recovery,that was all wrong.
And it was starting to become apparent,I would say by the summer of 2021,
but, but certainly became apparentin the second half of 2021.
So we did start reeling back inthe very long time horizons,

(43:32):
instead of saying zero interest ratesout to 2024, maybe only till 2023,
maybe only eventually, only to 2022,and then eventually we did raise rates.
I think the other thing that'sreally instructive about this
episode was that the very sharpincrease in the policy rate

(43:54):
in 2022 was a very successfulpolicy that was, you know,
475 basis point increases in a rowwith more to follow after that,
eventually to a policy rate of 5 and 3,8,
which was considered unthinkableeven nine months earlier.
So I think that is exactlythe moment where inflation started,

(44:20):
stopped rising and started falling.
And I think it's that credibility effect,the fact that the committee was able and
willing to say that it was goingto defend the inflation target.
And so you better take this on board ifyou're out there in the private sector.
And the private sectordid take it on board and

(44:41):
the inflation ended very rapidly comparedto other inflations that we've seen and
before there could be a recession.
So I think this is a template forhow to do this in the future.
This is all about credibility andFed policy and
very little about the mechanics of,let's say, supply side disruptions.

(45:05):
And let me just say one other thingabout supply side disruptions.
So for those that are listening here and
are thinking of aggregate supply demanddiagram, what they're doing in their
minds is shifting that aggregatesupply curve to the left.
And so output went down andprices went up.
That's fine, I suppose, butif you think that's all that happened and

(45:27):
the supply curve went back to normal,then the prices would have had to fall.
And that didn't happen.
The price level never fell,it just kept going.
It either went up orit stayed at the higher level.
And so I think it's strained.
A strange version of that story is to saythat the only thing that happened was that
there was supply disruption andthen the supply disruption went away.

(45:51):
There has to be much moreto the story than that.
And that's why I think a big componentof what happened was the demand
side component.

>> Jon Hartley (46:01):
So I want to talk a little bit more about just research in general.
You're a great academic and great scholaron top of being a great policymaker.
You did a lot of research duringyour time at the St. Louis Fed.
I'm curious, part of what you overseeis deputy research director and

(46:21):
president are all these models that theregional Fed bank builds and maintains.
Often there's a house DSHEmodel which has considerations
about welfare andoften has things like prices and
Phillips curve and so forth,three equation model.

(46:43):
And then you also have vector autoregressions which are kinda a theoretical
and are really just correlational anddon't have too much economic intuition.
I'm just curious, you know,how do central bankers and
policymakers actually usethese in your experience?
I mean on this podcast we've spent a lotof time talking to central bankers and

(47:04):
macroeconomists and
I think one recurring theme that's comeabout is that I feel like central bankers
often don't necessarily seem to finda whole ton of value in DSG models.
I mean vars typically produce betterforecasts, albeit less, you know,
they have less economic intuition.
But I'm just curious, obviously,maybe some more research oriented monetary

(47:26):
policymakers may sort of think aboutthe models a little bit more deeply,
especially if they were the ones that kindof developed that initial research like
folks like Rich Clarita.
But my understanding, my sense is thatthere's a massive subsidy toward this
kind of research that goes on at the Fed,but
there isn't a whole lotof usage out of it.
I mean, you can see in sort of academiathere aren't a ton of people that work on

(47:49):
three equation and Kinsey DSG models,
at least compared to howmany did 30 years ago.
I'm curious, what's your take in termsof what are the things that researchers.
That the, in the Federal Reserve system,
the central banks actuallyshould be working on.
I mean there's a lot of reallycool innovations out there,
like I think, GDP now.
Now casting,I mean it's been a huge contribution
that's been made by the Atlanta Fed andthe New York Fed.

(48:12):
I'm curious, what are the sortsof research functions that you
think research teams shouldbe focusing on more and
which things do you think theyshould be focusing on less?

>> James Bullard (48:23):
Yeah, I would say post 1980s era has been
characterized by a sort ofa big debate between people
that just wanted to use databased empirical results and
make policy based on thatversus other people that

(48:43):
said [COUGH] you can't makeany progress without more
specification of what you thinkis going on in the model.
And the outcome of that debate,
there was all this identificationliterature in the VAR literature that said
that there's really a model line behindyour empirics and what is that model.

(49:08):
And I think that all kinda led tothe conclusion that there's really
no substitute for a structural model.
And even if you say you don'thave a structural model model,
you don't want to have a structural model,you still have one in the back of your
head that's guidingeverything that you do.
So might as well write that down andmake that explicit.

(49:28):
And so that whole line ofthinking one carry the day.
I still love the ARS because I likesimple characterizations of the data and
I understand that they're not totallyright and they don't always take care
of everything that you need to takecare of in order to make an inference.

(49:50):
And that's okay with me, butI think in good hands for
people that understand all those issues.
I think you still want to get some senseof where the data is and that guides you
into thinking about what the next stepsin your structural modeling might be.
As for where the directionof future research is and

(50:12):
I think is very timely todayit's all about heterogeneity and
I think the idea that you can simplyabstract from the income distribution or
the wealth distribution orthe consumption distribution is too much.
And to really understand the economy andthe effects of monetary policy,

(50:33):
you really need to understandthat entire distribution.
I would say that thoseissues are wide open.
I wouldn't say there's any modelthat is a clear victor on that,
but I actually have someresearch of my own on this.

(50:55):
So those that are listeningwanna look at it.
It's in a volume called the Futureof Macroeconomic Policy,
sponsored by the IMF andthe Reeks bank in I'm sorry,
the Norwegian Central Bank.
And that paper makes an argument thata lot of the standard things that

(51:18):
we do in macroeconomics andthat we recommend in macroeconomics
would extend to a world where youhave realistic Gini coefficients for
income and wealth and consumption.
So it's an argument that we're notthat far off as far as where we
need to be in terms ofmacroeconomic policy.

(51:40):
I'm sure there's refinementsthat could be made, but
the kinds of things that we doreally do make a lot of sense.
Even when you haveheterogeneity among households.

>> Jon Hartley (51:50):
That's fascinating and amazing to hear about your research and
some of your earlyresearch on heterogeneity.
Heterogeneous agents is certainly a hugetopic right now in macroeconomic research,
along with, I think,relaxing some of those full information,

(52:12):
rational expectations,assumptions, and so forth.
I'm curious, just pivoting a little bit,
what's it like now beinga business school?
Dean at Purdue?
Purdue is very unique.
It's a very unique place in termsof has a lot of disciplines.
It's got a famous flight school.
You've got a lot of engineering, a lot offantastic business and management courses.

(52:34):
Curious, what differentiates the Ms.
Daniels School in Purdue in your mind andwhat are your key objectives Dean?

>> James Bullard (52:42):
Yeah, the the engineering school at Purdue is number
four in the nation.
So it's MIT, Stanford, Berkeley and
Purdue according to the some rankings,some of the most recent rankings.
So but Purdue turns out moremore engineers than anybody in
the country this year.
So I think the strengthis all in technology.

(53:04):
My story has been that technology atethe business world a long time ago.
And so what you need to do forthe business school here going forward is
to integrate technology in business soit's tightly integrated.
It's one in the same thing tothink about what's the latest

(53:27):
technology that could disruptbusinesses in the future, but
also to have the engineers knowbasic business principles so
that they can take interesting ideas and
take them all the way to market andbe successful.
So I think that sort of business andtechnology integration is going

(53:49):
to be very promising forthe Daniels School here going forward.
And so hopefully we'll be ableto carry that forward and
have lots of great students thatcome through our program and
are able to make great contributionsin the business world, so
we have a lot of that already, but I thinkwe can take it to an even higher level.

(54:11):
So I'm looking forward to working on that.

>> Jon Hartley (54:13):
Well, it's exciting following everything that's been
happening in Purdue.
And I've met with President andformer Governor Mitchell in the past,
and I know he was a verytransformative president for
Purdue, and I think it's wonderfulto see that he's the namesake for
the business school thatyou're now leading.
A real honor to have you on, Jim, and

(54:35):
it's amazing to hear about your career andideas.
And you're wonderful whatyou're doing at Purdue.
And I think combining engineering andbusiness is brilliant.
You think about CEOs like Jensen Wong andElon Musk.
There are engineers and CEOs.
I think that's a terrificdirection to take Purdue.

(54:55):
And really amazing hearing about yourincredible career at the St Louis Fed.
Really want to thank you somuch for joining us.

>> James Bullard (55:03):
Well, thanks for having me.
This has been very fun, and thanks fordoing the podcast, it's excellent.

>> Jon Hartley (55:10):
This is the Capitalism and Freedom, the 21st Century podcast,
an official podcast ofthe Hoover Economic Policy Working Group,
where we talk about economics,markets, and public policy.
I'm Jon Hartley, your host.
Thanks so much for joining us.