STARKVILLE, Miss. (WCBI) – Gross Domestic Product, income curves, Q-E 2 platforms, they are all technical economic terms that boggle the mind of most people. But the terms do have an impact on everyone.
President Barack Obama and Congress have big ideas about how to keep the nation’s economic engine growing. Cut taxes, raise taxes, cut spending, create investment, raise the minimum wage…those are all some of the buzz words. Thursday professors and community leaders got some insight from a top Federal Reserve policy maker about how he approaches deciding economic policy and what it means to the man on the street paying the bills.
James Bullard with the 8th District Federal Reserve Bank in St. Loius says, “I try to talk to business leaders and many others to learn about the economy in this area and keep track of what’s going on and talk to all the people here.”
For more than four years, the Federal Reserve has used its policies to keep interest rates at near-record lows. The idea is to stimulate growth and job creation by making it cheap for business, industries and consumers to borrow money for everything from machinery to houses. And Bullard thinks its working.
According to Bullard, “I think unemployment will continue to trickle down through 2013. I’m an optimist on the 2013 economy so I think we’ll get somewhat faster growth than what the private sector forecasters are predicting. I’m saying it’ll be over 3% growth this year.”
But with a fiscal cliff looming for the third time in six months, many economists and businesses are not that optimistic. But Bullard says some small steps are better than none, even though he acknowledges Congress and the President must bite the bullet soon to reduce deficits and debt.
Bullard says, “The fiscal cliff has certainly been an important consideration. We did make partial progress on the fiscal cliff in the New Year’s Eve deal.”
And Bullard says whatever the decision, it won’t hit the economy at once. He says we should take a longer-term view.
According to Bullard, “The notion that if you change the tax rates and the spending on a particular day and that you have a big impact on the economy on that day. That isn’t the way to think about it because people are seeing that coming up ahead of time and they’re changing their behavior which evens out.”
The biggest headache for job creators is continuing uncertainty over how to proceed.
The last minimum wage hike increase went into effect in july 2009.
MSU: Federal Reserve Bank of St. Louis President and CEO James Bullard Thursday gave area bankers, university leaders and others a special opportunity to hear about the nation’s current monetary policies.
Bullard, the Eighth District’s member of the Federal Open Market Committee, visited Mississippi State University to participate in a special banking forum, sponsored by the College of Business’s Department of Finance and Economics. He discussed recent changes to U.S. monetary policy, drawing several distinctions between 2012 and 2013. He conveyed optimism for the economy in 2013, saying he expects to see unemployment rates continue downward through the year.
“The current stance of U.S. monetary policy is considerably easier than it was in 2012,” Bullard said, explaining that 2012 policy was characterized by a relatively weak “Operation Twist” program combined with somewhat counterproductive date-based forward guidance.
Bullard discussed how the Fed’s nominal interest rate policy has been near zero since December 2008 and said the FOMC plans to maintain the near-zero rate into the future, creating “forward guidance.” He said that prior to December 2012 the FOMC said the policy rate would likely remain near zero until mid-2015. This created a ‘pessimism problem’ for the committee, he said.
“The date could be interpreted as a statement that the U.S. economy is likely to perform poorly until that time.” Bullard called this an “unwarranted pessimistic signal,” but said the committee did not intend to send such a signal.
Rather than using a given date, Bullard said the FOMC has now changed its forward guidance to a description of economic conditions at the time of the first rate increase. Such a dependency on economic conditions is known as a “state-contingent” policy, he said.
“The threshold approach has disposed of the ‘pessimistic signal’ that was a side effect of the date-based forward guidance. This should make the forward guidance more effective,” Bullard said.
Bullard noted that while use of thresholds is not a panacea, the thresholds will likely be viewed as triggers for action.
While the interest rate component is one half of the Fed’s monetary policy, Bullard explained how the Fed’s balance sheet policy also has adjusted over the past few months. In particular, Bullard discussed QE3, referring to the Fed’s third round of quantitative easing, which the FOMC adopted at its September 2012 meeting and extended in December, replacing “Operation Twist” with outright purchases.
The current approach is to purchase $40 billion in mortgage-backed securities and $45 billion in Treasury securities per month, which Bullard noted would be an annualized purchase pace of more than $1 trillion. This is in contrast to the “Operation Twist” program which consisted of buying and selling assets of different maturities simultaneously, he said.
“Open-ended outright purchases are a more potent tool,” he said, adding that the FOMC has promised to maintain an aggressive asset purchase program.
Bullard said that with QE3, the committee seeks “substantial improvement” in labor markets before pausing purchases. He explained numerous factors and measurements can help determine status of labor markets, including the unemployment rate, employment, total hours worked and workplace turnover data.
Bullard noted that substantial labor market improvement does not arrive suddenly. He said he continues to suggest to the committee that as labor markets improve somewhat, the pace of purchases could be reduced somewhat, but he would not recommend ending purchases altogether.
Bullard continued that inflation and inflation expectations also are a consideration for the QE program. He said current readings on inflation are relatively low, which may give the FOMC some ability to continue asset purchases longer.
“2013 is characterized by a relatively potent open-ended outright asset purchase program combined with more effective threshold-based forward guidance,” he said.
“Considerations for the future of the QE program are multi-faceted and will require a careful judgment of the committee in the coming quarters.”
Mississippi State is located in the Eighth Federal Reserve District, and Bullard said his travels allow him to gather information on the regional economy, as well as talk with many people in the district about economic factors.
For more on Mississippi State University, visit www.msstate.edu.