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A Tame Taper
James Bullard
President and CEO, FRB-St. Louis
Arkansas Day with the Bank Commissioner
16 May 2014
Little Roc...
Introduction
Recent themes in U.S. monetary policy
The taper has been tame compared to last summer.
Looking through weak first quarter ...
Tame Taper So Far
The taper tantrum
What happened during the “taper tantrum” in the summer of
2013?
 U.S. interest rates increased.
 Emerg...
Longer-term U.S. interest rates increased
Source: Federal Reserve Board. Last observation: week of September 20, 2013.
Emerging-market currencies depreciated
Source: author’s calculations. Last observation: week of September 20, 2013.
Emerging-market capital inflows reversed
Source: Nechio, Fernanda. “Fed Tapering News and Emerging Markets.” Federal Reser...
Emerging-market stock indexes dropped
Source: author’s calculations. Last observation: week of September 20, 2013.
The actual taper
The taper tantrum during the summer of 2013 was based on
perceptions of Fed actions.
The actual taper did...
Longer-term U.S. interest rates declined
Source: Federal Reserve Board. Last observation: week of May 9, 2014.
Most emerging-market currencies appreciated
Source: author’s calculations. Last observation: week of May 9, 2014.
Most emerging-market stock indexes increased
Source: author’s calculations. Last observation: week of May 9, 2013.
Interpreting the taper
The FOMC took no explicit policy action at the June 2013
meeting, yet triggered a significant movem...
Looking Through First-Quarter Data
First-quarter GDP growth
The reported annualized U.S. real GDP growth rate for 2014
Q1 was close to zero.
Some tracking es...
Real GDP growth—recent data
Source: Bureau of Economic Analysis. Last observation: 2014-Q1.
Real GDP growth with forecasts for 2014
Source: Bureau of Economic Analysis and Macroeconomic Advisers. Last observation: ...
Interpreting Q1 GDP growth
While first-quarter GDP growth was weak, growth in coming
quarters is still predicted to be rob...
Much Closer to Goals
The FOMC is much closer to its goals
Over the past five years, unemployment in the U.S. has been
high and inflation has re...
An objective function
The distance of the economy from the FOMC’s goals can be
measured with a simple objective function:
...
An objective function
Set 𝜋∗ = 2, the FOMC’s inflation target.
For 𝜋 I will use the year-over-year PCE headline inflation
...
Objective function value since 1960
Source: Bureau of Economic Analysis, Bureau of Labor Statistics
and author’s calculati...
Objective function value since 2006
Source: Bureau of Economic Analysis, Bureau of Labor Statistics
and author’s calculati...
Distribution of objective function values
Source: Bureau of Economic Analysis, Bureau of Labor Statistics
and author’s cal...
Monetary Policy
Monetary policy
Question: If the Fed is relatively close to its objectives, why
is monetary policy so far from normal?
Two...
The labor market in one chart
Source: Bureau of Labor Statistics, Conference Board, National Federation of Independent Bus...
Inflation remains low
Source: Bureau of Economic Analysis. Last observation: March 2014.
Conclusion
Conclusion
The FOMC’s reductions in the pace of asset purchases have
proceeded smoothly so far.
First-quarter real GDP gro...
Federal Reserve Bank of St. Louis
stlouisfed.org
Federal Reserve Economic Data (FRED)
research.stlouisfed.org/fred2/
James...
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Awareness taper -bullard-little rock-16-may-2014-final

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Awareness taper -bullard-little rock-16-may-2014-final

  1. 1. A Tame Taper James Bullard President and CEO, FRB-St. Louis Arkansas Day with the Bank Commissioner 16 May 2014 Little Rock, Ark. Any opinions expressed here are my own and do not necessarily reflect those of the Federal Open Market Committee.
  2. 2. Introduction
  3. 3. Recent themes in U.S. monetary policy The taper has been tame compared to last summer. Looking through weak first quarter real GDP growth. The FOMC is much closer to its goals than at any time in the past five years. Inflation: Stabilized at a low level.
  4. 4. Tame Taper So Far
  5. 5. The taper tantrum What happened during the “taper tantrum” in the summer of 2013?  U.S. interest rates increased.  Emerging-market currencies depreciated against the U.S. dollar.  Capital flowed to the U.S.  Emerging-market equity prices declined.
  6. 6. Longer-term U.S. interest rates increased Source: Federal Reserve Board. Last observation: week of September 20, 2013.
  7. 7. Emerging-market currencies depreciated Source: author’s calculations. Last observation: week of September 20, 2013.
  8. 8. Emerging-market capital inflows reversed Source: Nechio, Fernanda. “Fed Tapering News and Emerging Markets.” Federal Reserve Bank of San Francisco Economic Letter No. 2014-06, March 3, 2014. Emerging Markets: Bond and Equity Fund Flows
  9. 9. Emerging-market stock indexes dropped Source: author’s calculations. Last observation: week of September 20, 2013.
  10. 10. The actual taper The taper tantrum during the summer of 2013 was based on perceptions of Fed actions. The actual taper did not occur until December 2013. The FOMC has reduced its pace of asset purchases four times by $10 billion each time. Yet the effects on global financial markets have been much less striking.
  11. 11. Longer-term U.S. interest rates declined Source: Federal Reserve Board. Last observation: week of May 9, 2014.
  12. 12. Most emerging-market currencies appreciated Source: author’s calculations. Last observation: week of May 9, 2014.
  13. 13. Most emerging-market stock indexes increased Source: author’s calculations. Last observation: week of May 9, 2013.
  14. 14. Interpreting the taper The FOMC took no explicit policy action at the June 2013 meeting, yet triggered a significant movement in global financial markets. Since December 2013, the FOMC has taken four explicit policy actions, yet triggered far less of a financial market response. One interpretation is that as of June 2013, it was premature to argue that the U.S. economy was strong enough to pull back on asset purchases. As of December 2013, better growth and employment data justified the taper decision.
  15. 15. Looking Through First-Quarter Data
  16. 16. First-quarter GDP growth The reported annualized U.S. real GDP growth rate for 2014 Q1 was close to zero. Some tracking estimates are calling for an even lower reading once revised data are taken into account. The weak first-quarter performance has been widely attributed to particularly cold and snowy winter weather.
  17. 17. Real GDP growth—recent data Source: Bureau of Economic Analysis. Last observation: 2014-Q1.
  18. 18. Real GDP growth with forecasts for 2014 Source: Bureau of Economic Analysis and Macroeconomic Advisers. Last observation: 2014-Q1.
  19. 19. Interpreting Q1 GDP growth While first-quarter GDP growth was weak, growth in coming quarters is still predicted to be robust. The average quarterly pace of growth in 2014 may still be an improvement relative to 2013.
  20. 20. Much Closer to Goals
  21. 21. The FOMC is much closer to its goals Over the past five years, unemployment in the U.S. has been high and inflation has remained relatively low. This situation has led to an extraordinary monetary policy response. But today, Fed goals are within sight. This helps to justify the FOMC’s tapering of asset purchases.
  22. 22. An objective function The distance of the economy from the FOMC’s goals can be measured with a simple objective function: Distance from goals = (𝜋 − 𝜋∗)2+(𝑢 − 𝑢∗)2.  𝜋 is inflation and 𝜋∗ is the target rate of inflation, in percentage points.  𝑢 is the unemployment rate and 𝑢∗ is the long-run average rate of unemployment. This version puts equal weight on inflation and unemployment and is sometimes used to evaluate various policy options.
  23. 23. An objective function Set 𝜋∗ = 2, the FOMC’s inflation target. For 𝜋 I will use the year-over-year PCE headline inflation rate. Set 𝑢∗ = 5.4, the midpoint of the central tendency of the FOMC Summary of Economic Projections. How far away is the Fed from its goals?
  24. 24. Objective function value since 1960 Source: Bureau of Economic Analysis, Bureau of Labor Statistics and author’s calculations. Last observation: March 2014.
  25. 25. Objective function value since 2006 Source: Bureau of Economic Analysis, Bureau of Labor Statistics and author’s calculations. Last observation: March 2014.
  26. 26. Distribution of objective function values Source: Bureau of Economic Analysis, Bureau of Labor Statistics and author’s calculations. Last observation: March 2014. 0 5 10 15 20 25 30 0 10 20 30 40 50 60 70 Objective function value 1960-present Frequency (percent) Mar-2014 the objective function value is closer to the FOMC’s goals than it has been about 60% of the time since 1960
  27. 27. Monetary Policy
  28. 28. Monetary policy Question: If the Fed is relatively close to its objectives, why is monetary policy so far from normal? Two reasons:  Labor markets do not seem to be fully recovered.  Inflation remains low. I can illustrate these two points with two charts.
  29. 29. The labor market in one chart Source: Bureau of Labor Statistics, Conference Board, National Federation of Independent Business, and author’s calculations, based on a chart constructed by the FRB of Atlanta. Last observation: April 2014.
  30. 30. Inflation remains low Source: Bureau of Economic Analysis. Last observation: March 2014.
  31. 31. Conclusion
  32. 32. Conclusion The FOMC’s reductions in the pace of asset purchases have proceeded smoothly so far. First-quarter real GDP growth was weak, but forecasts for the remainder of the year are strong. The FOMC is much closer to its policy goals than it has been in the past five years. Inflation remains low.
  33. 33. Federal Reserve Bank of St. Louis stlouisfed.org Federal Reserve Economic Data (FRED) research.stlouisfed.org/fred2/ James Bullard research.stlouisfed.org/econ/bullard/

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