Bloomberg: Fed’s Bullard on Policy, Labor Market, Economy

Federal Reserve Bank of St. Louis President James Bullard discusses policy, strength of the labor market, and outlook for the US economy with Bloomberg’s Mike McKee on “Bloomberg Surveillance.”

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Transcript

As Roseanne Rosanna Danna used to say on Saturday Night Live it’s always something we were in the middle of a quote-unquote banking crisis and now we’ve got another oil shock uh this morning everybody waking up to headlines and say maybe we go to a hundred dollars

So as a Fed official when you see that how are you reacting well on the financial stress I think you know this is a post Dodd-Frank world and I do think that the reaction to the banking problems uh was Swift and was appropriate and uh both here in the US and overseas and

So I think you know the idea that there are macro Prudential tools that you can use in that kind of situation to calm things down that seems to have worked so far you never know if there’s further things happening but if if there are we can react with macro potential tools again

And then on the policy the monetary policy side we can still proceed to fight inflation and and get inflation down during 2023 and 2024 back to Target so I think you know this idea that you can walking shoe gum at the same time you’ve got the macro Prudential tools for

Financial stress and you’ve got monetary policy to fight inflation we can do both as long as the financial stress doesn’t uh morph into something much larger and so far so good but knock on wood you’re never sure what’s going to be around the corner but does hundred dollar oil or

The idea at least of this oil shock complicate your job yeah well of course oil’s always uh the oil price is is always important I would have expected a somewhat higher oil prices anyway with China coming back sooner than expected during the first half here of 2023 and with your

Obscurring recession so both of those and strong data in the U.S all of those are are pretty uh bullish factors I would say for the oil Market this was a surprise that OPEC decision but whether it will have a lasting impact I think is an open question now you had already

Moved up your estimate of where the FED funds rate needed to be to bring down inflation you were talking an effective rate of around 5.6 percent does this change that calculation at all and can you explain why you think we need to go that high to hit the terminal rate

Uh I think we’ll we will need I think we’ll need to get over five percent the committee says that uh the median person on the committee says uh a little over five percent I’m a little higher than that um I think inflation will be stickier

And uh you know I’d look mostly at the core measures of inflation like pce core inflation or the Dallas fed trim mean which really hasn’t come down very much at all is still in the four percent range so uh you know 4.6 or something like that so

Um so we’re still talking about a lot of inflation more than double our inflation Target on that basis and uh oil prices fluctuate around it’s hard to it’s hard to track exactly some of that might feed into inflation and make our job a little bit more difficult just north of us this

Morning in Oak Brook Illinois McDonald’s has told its corporate officials to stay home uh this week because they’re going to start notifying people that they’re being laid off How concerned are you with all these headlines about layoffs coming in that you may go too far yeah the labor market is super strong uh

Still uh many more job openings than there are on unemployed workers I think if a worker does get disrupted uh today that they should you know let’s hope and and pray for them that they’ll be able to get a new job but it’s still a very robust labor market with uh 3.8 percent

Unemployment um uh you know the Kansas City feds labor market conditions index still at a super high level uh jobs reports have been very very strong in 2023 here so you’re really not seeing much having uh in the labor market I think there are structural issues where labor Supply is

Running under labor demand and and that’s going to take quite a while to uh to settle down what are you expecting for Friday the jobs report uh I don’t have an I don’t have a number for you uh but uh anecdotal information seems to indicate that the firms are

Still scrambling for workers they’re doing some other things that are strategies that might slow this down a little bit they’re substituting capital for labor that makes a lot of sense in this situation um but I just think that on the whole they still need workers well if they

Still need workers and Supply is running below demand that has to complicate the idea of monetary policy because that’s not what’s supposed to happen when you’re raising rates as much as you have that’s true although I’m not as oriented toward the Phillips curve as many but I think

The way I would state it is that the strong labor market gives us Headroom to fight inflation it’s a good time to be fighting inflation and trying to get inflation back to Target while the labor market is as strong as it is and even workers that get disrupted hopefully

Will be able to find a new job and maybe a better job in this situation you have critics around the country and certainly on Capitol Hill that say workers are finally getting their share wages are going up not quite keeping up with inflation but much better than they had

Been and here comes the FED wants to squash them down again and cut the wage increases in order to bring down inflation what do you say to those people well what are they talking about real wages have gone down for most people so the inflation is hurting them so

Inflation is hurting the average worker so you don’t think the FED has a perception problem with America these days you’d like to get rid of the inflation so that people can get there uh get a better uh labor market outcome and be able to afford the goods that they have to purchase so

Um I think there’s been a lot of confusion around this issue it’s true that some some workers in some categories got more than the increase in wages that more than made up for inflation but for many workers that hasn’t been the case they’ve been lagging behind in real wages and that’s

Why you’d like to bring inflation under control and get a better outcome for the labor market markets have been struggling this morning to figure out what’s going to happen going forward with the oil price headlines but going into this weekend they were pricing four rate Cuts over the coming year why are

You when Wall Street so far apart in what you say is likely to happen they should listen to me uh so the uh here’s what I think I think I put 80 probability that the financial stress will decline and then make that your base Baseline uh forecast I think that’s

For low growth but growth a continued pretty strong labor market and inflation coming down that’s got 80 percent probability maybe now I’d go to 85 percent probability or something and then the other Branch uh where Financial stress gets worse uh then uh you know then we’ll have to

Bring out more macro Prudential tools and it’ll be a stressful situation and all bets are off in that situation the problem with Wall Street is they’ve got too much probability on that branch and not enough probability on the other Branch I think they’re going to reprice

To the uh slow growth scenario and so I think we’ll see this change in the weeks ahead here go back to the banks for a second in February uh the staff at the Open Market Committee presented on the idea of these asset mismatches on bank balance sheets so you were kind of aware

That this could be a problem was there something that the FED missed or did didn’t do or should have done to keep these the the bank situation we’ll call it from developing as it has I can’t talk about what was presented at the fomc meeting so I will neither

Confirm nor deny that but my own staff here was certainly well aware of issues with banks we talked to Bankers all the time where a regulator of Banks and so we knew uh that there were issues about let’s say uh some deposits running off uh to non-bank entities that wanted to pay a

Higher rate that’s occurring but I think at a rate that’s certainly manageable for at least for the banks that we talked to they’ve got some Securities Holdings that have lost value as interest rates have gone up but that also I think is manageable for nearly all institutions so that you know they’re running

Businesses and they’ve got challenges but they’ve also they’re also competitive and they’ll they figure out ways to manage the situation I would also say anecdotally that most banks say loan demand is is strong and they actually have incentives to make loans at the higher interest rates if they can in

Order to offset some of the older loans that they have that are that are at lower interest rates well we got to send it back to Tom but given how Tom introduced us you’ve got predictions for interest rates growth GDP the end of the year Cardinals prediction

I’m sure it’ll be a great year for the Cardinals I think they’ll win the division and they’ll do very well another Victory yesterday so excellent

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