Jim Bullard, the President of the St. Louis Federal Reserve Bank, and one of the Fed members calling for rate hikes as recently as March (and just last month said he was considering one in June) has moved from hawk to uber-dove. Mr. Bullard now thinks the Fed should stay on hold for two and a half years. It would seem that a single weak employment report was the catalyst to drive Mr. Bullard to change his outlook and model for the U.S. economy. He now says the economy is in a new regime.
It is more than a little concerning that the guys in charge of the economy are basing their decisions on economic models that can be thrown out the window on a whim. This issue here might be that the Fed board has been stacked with PhD economists who put far too much faith in economic models and give far too little weight to common sense policy. Based on his recent reversal, Mr. Bullard would seem to fall into the camp of being wedded to economic models.
If years and years of zero rates and bond buying didn’t ignite economic growth in Japan, and years and years of zero rates and bond buying didn’t ignite growth in the U.S., and years of zero rates and bond buying aren’t igniting growth in the euro-area, maybe, just maybe, those policies don’t work. Maybe rates lose their stimulative power and begin to hinder growth when they are left at zero too long. Common sense would say that one should at least explore this idea rather than doing more of what hasn’t worked.
CNBC has more on Bullard’s flip-flop below.
Jeremy Jones, CFA
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