President James Bullard Delivers the George S. Eccles Distinguished Lecture
By Christine Arrington
Following in the footsteps of such economics luminaries as Alan Greenspan, Milton Friedman, Peter Drucker, and John Kenneth Galbraith, President James Bullard delivered the George S. Eccles Distinguished Lecture April 16 at the Jon M. Huntsman School of Business.
President Bullard explained his view that setting an explicit inflation target, as the Federal Reserve System did for the first time in January 2012, is consistent with the Fed’s “dual mandate to promote maximum employment and stable prices.” He offered his congratulations to Fed Chairman Ben Bernanke for the adoption of this policy that he has supported since the beginning of his term.
He said the argument over inflation targeting is “the modern-day equivalent of the gold standard,” in that the question was very contentious in the past but international opinion eventually converged. “After the Panic of 1907,” he said, “even the last gold holdouts threw in the towel.”
He affirmed that the United States, with its economy that is similar in size to that served by the European Central Bank, finally joined many central banks around the world in setting an explicit inflation target. He showed the following graph that illustrates how similarly central banks have behaved in the face of the current economic recession.
Central banks have behaved similarly in their interest rate policies since 2007
President Bullard is an economist and monetary policy scholar who was been with the Federal Reserve Bank of St. Louis since 1990 and has been president and CEO since 2008. He participates in the Federal Open Market Committee (FOMC), which makes key decisions about interest rates and the growth of the U.S. money supply. He holds a doctorate in economics (1990) from Indiana University in Bloomington and bachelor’s in economics and in quantitative methods and information systems (1984) from St. Cloud State University in St. Cloud, Minn.
The George S. Eccles lecture series was started in 1974 by the Eccles Foundation, in honor of Mr. Eccles’ distinguished banking career and his lifelong interest in “raising the economic literacy and business acumen” of students at USU. That goal meshed perfectly with the Federal Reserve’s mission, one aspect of which is to promote financial literacy and economic education.
President Bullard met that goal with a lively lecture entitled, “Hawks, Doves, Bubbles, and Inflation Targets,” leavened with humor and punctuated with interesting insights.
He presented three equations in a simple “toy” model that addresses three key components of the economy:
- Households maximize their material well-being.
- Firms hire workers and produce output for sale to households.
- Monetary authority sets short-term nominal interest rates.
He then demonstrated how in this simple model the central bank can “move the nominal interest rate to offset incoming shocks exactly, and inflation remains at the target rate and employment remains at the maximum level.”
He acknowledged that “there are more aspects to policy than just the inflation target,” and that this simple model didn’t take into account unemployment, housing, and financial market stability.
“In the real world, policy can’t fully offset economic shocks,” he said.
James Bullard, speaking to students during his presentation.
Photo by Steve Eaton
He then cited the work of Michael Woodford on interest rates and prices, work that supports the key assumption that prices are sticky to a certain extent. He thinks Mr. Woodford may well win the Nobel Prize for his work. He acknowledged the other point of view, from Dr. Ed Prescott, that “prices are perfectly flexible, implying “no role for monetary policy.”
President Bullard summarized what was learned during the global inflation debacle of the 1970s, with four recessions in 13 years, until Paul Volcker got it under control. He said, in a bit of a deadpan understatement, “If inflation gets started, it’s hard to control.”
Under the theme of “bubbles,” he acknowledged the fear that keeping interest rates too low for too long might lead to bubbles down the line. Actual interest rates have been near zero since 2008. Following a kind of Taylor rule, he said, nominal interest rates should go up more than the deviation of inflation from the target.
“So far, the consumer price index and inflation have remained low, but I have hawkish leanings on that question,” he said, meaning he is inclined to place more weight on inflation than on the output gap and would favor early vigilance and action against inflation.
In the question and answer session, one student read Fredrick Hayek’s citation of Vladimir Lenin’s famous statement, that the best way to destroy an economy is to deflate its currency.
President Bullard replied that he’s right, and that throughout history, a lot of “currency mischief” has gone on, with “politicians trying to get the central bank to inflate the currency.” His recommendation: “The Central Bank should be kept independent”—an interesting point since George S. Eccles’ brother, Marriner S. Eccles (from Logan, Utah), is widely regarded as having been a decisive champion of the Federal Reserve’s being kept strictly independent, while he was chairman of the Federal Reserve Bank during the 1930s and ‘40s.
Another student read a quotation from Thomas Jefferson that was critical of banks, i.e. “If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered.”
President Bullard paused and then said, somewhat humorously, “You can’t out-market me. I’m the North Star of markets!” “Again, we must keep the Fed independent,” he continued. “We’ve had other systems, with mixed results.”
Click here to view James Bullard's speech.