‘Gadfly’ catches Donald Trump’s eye with support for lower interest rates
The overlap in their desire for looser monetary policy may be on the verge of boosting influence of head of St Louis Federal Reserve
St Louis — In 11 years as head of the St Louis Federal Reserve, James Bullard has found himself on most sides of the big debates inside the US central bank.
He has argued for aggressive efforts to lift the economy and at other times against them. He has criticised colleagues for doing too little to lift low inflation and for not acting to keep price growth in check.
It has earned Bullard, 58, a reputation as something of a gadfly in monetary policy circles, though The Economist magazine once ranked him among the world’s 10 most influential economists.
For the past three years, though, well before President Donald Trump’s election, he has settled in place — as arguably the most ardent voice in favour of lower interest rates inside the Fed. It’s a position that has caught the eye of Trump and others in the administration as the president pounds on the Fed to lower rates, albeit for different reasons than Bullard.
Bullard sees the US as stuck in a low-growth rut, in contrast to Trump’s best-economy-in-the-world rhetoric. Still, the overlap in their desire for looser monetary policy may be on the verge of boosting Bullard’s influence.
Trump has announced plans to appoint one of Bullard’s top staffers to the Fed’s board of governors, an economist who shares at least some of his boss’s views. There has been speculation Bullard could be a top candidate for Fed chair if Trump wins a second term.
I think I have demonstrated my credentials as far as calling my own shotsJames Bullard, head of the St Louis Federal Reserve
Bullard “is a real thought leader in the Federal Reserve system”, Trump’s chief economic adviser, Larry Kudlow, said in September, a remark that came just days after Trump had called Fed officials “boneheads” and chair Jerome Powell naive.
It also came after Bullard dissented against the Fed’s quarter of a percentage point rate cut because he wanted double that, his second dissent in favour of lower rates since June.
“At times I have been in the middle of the committee. At times I have been on either end of the spectrum depending on the economic situation,” Bullard said last week after a Chamber of Commerce luncheon in Illinois. “I think I have demonstrated my credentials as far as calling my own shots.”
Where will he land?
Bullard’s willingness to keep an open mind about how the economy works is valuable to a committee where “groupthink” can be a risk, said Nathan Sheets, a former Fed staffer and now chief economist at PGIM Fixed Income. Nonetheless that can be difficult for investors who crave predictability.
“His views are intellectually based ... and those watching the Fed are well served to be thinking about what he is saying,” Sheets said. “The question is over time, as he continues this journey, might he land at a different place?”
That is a question Trump would have to ponder as well as he seeks to mould a Fed board more to his liking.
Powell, the president’s own pick as chair, lifted rates four times in his first year on the job, and Trump denigrated him for it. Powell’s term lasts until February 2022. Meanwhile Trump has struggled to fill two open seats on the Fed's seven-member board.
The two people under consideration, economist Judy Shelton and Bullard’s research director, Christopher Waller, have yet to be formally nominated.
In an interview in September on SiriusXM Business Radio, Bullard said Waller, who taught at the University of Notre Dame before joining the St Louis staff, would be a “great addition” to the Fed board who would have “his own views” about policy.
The two share some of the same concerns.
Both have made the case for more than a year that worrying signals in the bond market argued for caution on rates, with yields on long-term debt threatening to slip below shorter-term yields in a potential signal of a coming recession. It’s a debate that overtook the Fed earlier this year when yields did invert, and added impetus to the recent decision to cut rates.
Meet me in St Louis?
It isn’t the first time the St Louis Fed has argued for a different approach.
A half-century ago, St Louis officials publicly stumped for the monetarist theories of Milton Friedman and were criticised for clashing with the Fed leadership of the day. Their ideas were later embraced in the Fed’s 1970s battle against inflation.
Bullard, a Minnesota native with a doctorate in economics from Indiana University at Bloomington, landed at the St Louis Fed in 1990. He has a heartland background in contrast with the Wall Street and coastal university resumes common at the Fed.
While seen as something of a policy outlier, it’s also true the economy of late seems to fit his description of it.
When US central bankers started raising rates in 2015, they thought they were on a climb back to levels near those that prevailed before the 2007-09 recession.
Within months Bullard lost confidence that would happen. He adopted a “regime-based” view in which he argued that the economy would not necessarily converge on one long-term outcome, the conventional approach to monetary policy, but could switch between different states. The new normal he saw was one of low inflation, low growth and low interest rates — until something happened to make it otherwise.
Waller was among Bullard’s co-authors of the paper introducing that view.
“For a variety of reasons, that seems the world we are in,” said Yale University economist Bill English, former head of the Fed’s monetary affairs division.
The discussion seems to have drifted his way.
Since 2015, the median expectation among Fed officials for interest rates in the long run have come down by a full percentage point, much more aligned with Bullard’s world view.
“I do think that broadly speaking both markets and parts of the committee have moved closer to my view,” Bullard said in an early September interview. “They might not use the same language, but I think they have moved closer.”