St. Louis Fed president supports ending accommodative policy

Federal Reserve Bank of St. Louis President James Bullard has announced his support for ending the Fed’s accommodative monetary policy.

Bullard’s comments came during his “The Inflation Shock of 2021” presentation Friday during a Missouri Bankers Association meeting, one month after Federal Reserve Bank of New York Gov. Christopher J. Waller also argued that the Fed should taper its economic support at a faster pace as those inflation concerns continue. 

Last December, the committee indicated it would continue increasing its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month “until substantial further progress has been made toward its maximum employment and price stability goals.” The Federal Open Markets Committee in early November unanimously voted to reduce its monthly securities purchases from $120 billion to $105 billion as more people became vaccinated against Covid-19. The committee said it expected to continue its massive support for the economy until maximum employment is reached and long-term inflation remains “moderately above” 2 percent. 

U.S. real gross domestic product has fully returned to pre-pandemic norms, and labor markets are strong and likely to become even more so. National income is higher than its previous peak and is expected to continue to grow at an above-trend rate. To Bullard, monetary policy settings mainly remain as set during the recession when inflation lagged below targets and measures of real activity were weak. 

 “Monetary policy this accommodative might be justified if the real economy had not yet recovered,” Bullard said. “However, real GDP has already passed the pre-pandemic peak and is slated to move considerably higher. In addition, many labor market measures indicate very tight labor market conditions.”

The inflation forecasted in the December 2020 Summary of Economic Projections reported that the median FOMC participant believed inflation — core and headline personal consumer expenditures — over the last 12 months would be 1.8 percent, less than the Fed’s 2 percent target. However, headline PCE inflation is over 5 percent today, and core PCE inflation is more than 4 percent, both at least doubling the FOMC’s target. 

“Monetary policy has remained accommodative even in the face of the inflation shock,” Bullard said. “The recession ended about 19 months ago, but the FOMC’s policy settings are still largely the same as when the recession began.”