James Bullard, president of the Federal Reserve Bank of St. Louis, spoke with Yahoo Finance to discuss inflation risks and what lies ahead for Fed policy.
Below is a transcript of his appearance on May 24, 2021.
AKIKO FUJITA: President Bullard, it's good to talk to you today. When you look back at the more recent economic data, it really did feel like the CPI number that came out a few weeks ago kind of spooked the market. We've also seen what was really a disappointing jobs number back in April. Walk me through how you're interpreting the data right now as you connect the dots?
JAMES BULLARD: Well I think we are going to see more inflation, that's not really a surprise. I think that maybe the size of that particular report — but that's just one number. So we'll see if the demand really flows through to a lasting increase in inflation or if this is just temporary. I think it's mostly temporary but then some of it will flow through to inflation expectations, and then we will get inflation above 2% this year and into 2022.
BRIAN CHEUNG: Hey Jim, Brian Cheung here. Great to speak with you. Now we've heard from some of your other colleagues in Dallas and Philadelphia namely, saying that they would like to talk about tapering sooner rather than later. Inflation might be one of the reasons there. And you had a very colorful quote in an appearance last week. You said, “there's a little bit of an inflation hawk in all of us.” If there's an inflation hawk inside you, what is that hawk maybe saying about when is the right time to have those discussions.?
JAMES BULLARD: Yeah I mean I think the inflation hawk aspect is that the big inflation that we saw in the 70s and 80s was very painful for the U.S. and took a long time to get rid of it. So, all the way into the 1990s. So no one wants to replay that experience, but the modern era that we're in now has been characterized by inflation which is too low relative to our inflation target. And so we're just trying to move inflation a little above target and approach our inflation target from the high side instead of from the low side, which is where we've been over the last 10 years. You've also got Japan and Europe mired in negative interest rates. We'd rather stay out of that game.
BRIAN CHEUNG: So it sounds like from that perspective you're not too worried about having that taper discussion soon but do you see maybe a case for modifying the $120 billion-a-month pace, there's been some suggestion that with the housing market looking hot maybe you could twist away from mortgage-backed securities and lean more heavily on the U.S. Treasury side of purchases, what do you think about that?
JAMES BULLARD: I think there will come a time when we can talk more about changing the parameters of monetary policy. I don't think we should do it when we're still in the pandemic. And I know we're getting closer and closer to the end here with more and more vaccinations every day. And so I, you know, I think it's tempting to feel like, you know, financial markets always want to look ahead. And that makes perfect sense, they have to price all these assets. But when you're in a crisis, I think you should make sure that you've accepted the crisis aspect before you think about changing policy. We're not quite there yet. I think we will get there in the months ahead. And that'll be the time when we can start thinking about altering our asset purchase policy.
BRIAN CHEUNG: So what does that say about your view on the labor market, we know that there's still over 8 million relative to pre-pandemic levels still out of jobs but will you call it a labor shortage? Because in our conversation with the San Francisco Fed President Mary Daly, she said don't call it that because it's a very interesting dynamic at play. What's the major reason, the top one, based off of what you're seeing in and around St. Louis for people not coming back to the jobs that appear to be out there.
JAMES BULLARD: Yeah, the anecdotal evidence is overwhelming that this is a tight labor market and I think we should look at measures which would corroborate that. Otherwise, you've got this glaring inconsistency between the way we're measuring the labor market and what people are actually saying about it. Firms are saying it's very difficult to hire workers right now. I think if you look at the unemployment-to-vacancy ratio. That's about a 1.2 today. Almost one job opening for every officially unemployed worker. So that makes a lot of sense that it would be hard to find workers in that environment. So its a much tighter labor market than other measures would suggest and I think maybe we should look at the u-over-v as a metric for where we are in labor market tightness.
AKIKO FUJITA: You also said recently that, you know, when you look at the type of fiscal support that's been available from Congress, you think that the one size fits all approach doesn't necessarily address the divide that we're seeing in the labor market between the rural markets, as well as the urban markets too. Can you talk a bit about how those recoveries are diverging right now and what is the solution here to address that?
JAMES BULLARD: Well the top off in the unemployment benefits from the federal government was certainly welcome. These markets are very different rural labor markets. Kentucky or Mississippi or rural Missouri here is very different from big cities like like New York or San Francisco. And so the same numbers might mean different things in different places. So I'd really rather that Congress would calibrate that in a way that would be more attentive to the fact that these labor markets are different. And the pay scales. The pay scales are just different, so you're affecting individual incentives to come back to work differently in these different labor markets. And that's something that firms are very sensitive to. You've got small businesses that have been really down and out during the pandemic. They're now trying to come back in, get their revenue streams back up and running and they can't find workers. That's a very frustrating thing that's why we're hearing a lot about this, I'm certainly hearing a lot about this in recent weeks.
BRIAN CHEUNG: Well this is a fascinating element too because part of workers — rather employers — not being able to find workers is whether or not the incentives are matching what these types of people looking for jobs are really trying to get compensated for. especially with the risk of getting the virus still out there. So, how are you interpreting wage data from that standpoint? We'll get another employment report covering the month of May next week. Is the data still really noisy or are you really starting to see anecdotal evidence of wage pressures pushing up, which might actually pass over to overall price inflation as well?
JAMES BULLARD: Well these individual businesses are pretty good at what they do and so they try to get inventive about attracting workers. They might offer a one time bonus to take the job, they might offer a bonus to take the job and stay in it for 30 days or 60 days or longer. And they might just go ahead and raise the wage that they're offering on the grounds that they'd probably raise it in the future anyway. So, I think you are seeing some of the compensation be better, and, you know, certainly that's good news for workers.
I think what you alluded to at the beginning of your question though is that for a disrupted worker who's at the low end of the wage scale, I'm not sure exactly today if it looks like a really good situation to go back to work. Because you've still got residual risk on the pandemic itself. And so they're nervous about that. Maybe they wouldn't get paid all that much more than they used to so they're maybe thinking it's not that great of a labor market yet. And also these are very flexible markets where people come in and out all the time. So they might feel like they can just wait 30 days, or 60 days or 90 days and these jobs will still be out there so that it's not like if I turn this one down, I won't be able to get another one in the future. I think that's probably not the case. They probably will be able to get those in the future. So from the workers' point of view, it's not clear that everyone wants to just jump back in all of a sudden here. There are plenty of reasons. I forgot to mention daycare. You've also got kids at home still, that's been a big factor through this. So it's not so clear for disruptive workers that they just want to stream back into the job market.
BRIAN CHEUNG: Broadly, I want to switch over to financial stability risks, a lot of questions about the impact of running monetary policy this hot for this long. Do you see any sort of bubbles from your vantage point?
JAMES BULLARD: We monitor financial stability very closely, I would say it's higher— instability risks are higher than normal. But still not at an alarming level. I think you'll get a case on all sides of this from people on Wall Street, but we are trying to be very careful, look this over very carefully, and take it on board as a potential risk for the U.S. economy,
AKIKO FUJITA: How big of a risk does climate change rank, when you look at the broader challenges to financial stability. The Fed’s already set up these two committees to deal with the impact but what do you see as the headline risk on the issue of climate?
JAMES BULLARD: I think we've moved into the mainstream of central banks by joining the international consortium on this. We're certainly cognizant of the financial stability risks related to climate change, but we're doing risk assessment all the time on all kinds of issues, not just the climate change issue. So this is one in a catalog of possible risks to financial stability going forward. And climate, of course, is a slow moving object and so the sense in which it would feed back to financial stability is tougher to trace than it would be for other types of financial stability risks and might be more observable risky lending, for instance. So I think we have to take that into account, it's just a different type of risk than others that we have analyzed historically.
BRIAN CHEUNG: And Jim, we can't let you go without asking a question about cryptocurrency especially given all the volatility in prices over the last week — or even before that, well before that. So what are your views on cryptocurrency, its use case right now, and then by extension, how closely have you been watching a lot of the volatility in crypto markets as regards to the Fed’s work on a possible digital dollar?
JAMES BULLARD: How long do you have? I mean, I have a slide deck on this that's called “non-uniform currency and exchange rate chaos” and a couple of things that are in there. One is that currency competition is nothing new. Private currency issuance has been addressed historically in monetary theory. Milton Friedman said if you allow private currency issuance you'll get all kinds of private currencies being issued. And that's exactly what has happened. We have a couple of thousand of these around, most of them are worthless. Also, I think if the cryptocurrency can facilitate transactions that are difficult to make in conventional currencies, then they will have a purpose and might circulate alongside of the nation-backed currencies. So that's another thing I talk about there. They're also quite volatile, as it's been very apparent here in recent days, but the fact that different currencies have volatile exchange rates, that's a fundamental problem in the international monetary order and it's just that much bigger of a problem for privately issued currencies. But it's even a problem for nation-state type currencies where they trade in a volatile way against each other that seems to be distant from actual movements and fundamentals. So lots of interesting things going on in this space and of course the Fed is also looking at a Fed coin. So we've got a lot going on, watching this very carefully. And I guess that's, that's, in a nutshell that's where I'm at on this.
BRIAN CHEUNG: Jim, I want to follow up on what you just said about how maybe most of these are worthless. Wouldn’t that present sort of some financial stability risk. If a lot of people are putting money into this thing and it has a value that goes up a lot if they try to all liquidate at the same time, might that present some issues with a lot of financial institutions maybe getting involved as well?
JAMES BULLARD: Well, we hope that those that are involved know the risks. Of course any investment that you do can go up but it can go down as well. And so anybody that's putting a portfolio together has to balance the risk and reward as always in finance. So I think for the most part, people like going into this with eyes wide open, they're certainly not blind to the idea that this is a volatile area, and I would just encourage everyone to be careful and take the risks on board when you're making any investment.
AKIKO FUJITA: Some good words to end there St Louis Fed President James Bullard, it's great to talk to you today. Appreciate the time and thanks to Yahoo finance's Brian Cheung as well.