Former St. Louis Fed President James Bullard Talks Economy

We can catch up now with the former Sen Lewis FED President jimpallad for more. Jim, welcome back to the program sir. Smuch has taken place since this election. We've heard from the chairman Jpal Jpal suggesting to us that maybe they can pause if they want to. This is me inferring from what he's told us already, maybe as soon as December. Is that what you're taking away from recent communication?

Yeah, I mean, if it was me, I think they could make one more move here in December and then that would put them at four and three aids and then there'll be a debate about where neutral is.

But if you thought the meeting of the committee.

Thinks neutral is maybe three percent, then you have to have maybe one hundred basis points on top of that.

Or one hundred and twenty five even because.

You know inflation isn't all the way back down to target. So normally you would take the inflation difference and then multiply that by one point two five or one to five or something like that, and that's what a tailor roll would do.

That's going to put you right around four percent.

So they'd actually be pretty close to where they'd want to be, they'd have another move to make maybe in the first quarter or second quarter, and then after that it would depend on where inflation went during twenty twenty five. So they're in pretty good shape here, I think for the December meeting.

Jim, maybe for December, But moving beyond that, there's a real question. I haven't heard a lot about long and variable lags in a long time. And basically there's this feeling that maybe if markets are flying and we have this feeling that businesses are doing just fine, that everything can chug along at these interest rates, and you alluded to it, we could see a higher neutral rate. Just how much have you heard a change in tone from FED officials over the past couple of weeks.

Yeah, well, they've made a seventy five basis points of cuts already, so they're not in the same situation that they were in say June or July. And I think the growth scare that occurred in sort of the.

July August time frame has dissipated.

And now you've got GDP now Atlanta Fed at two and a half, and the last two quarters of growth have been pretty strong, above certainly above a potential growth rate for the US economy, and so I think, you know, they don't have to go too much further to be at the right rate for this level of inflation and economy that's you know, moving along pretty well.

Retail sales you reasonably good yesterday.

So given all of that, I just I'm trying to extrapolate this out to understand what this means at the long end, what this means for the yield curve at a time when suddenly people are rethinking just how much they can cut over a longer period of time. You add to this some of the pro growth policies that we've been talking about all morning.

How much are you.

Looking at bond yields resetting, not necessarily because of the political overlay, but because people are realizing that if it's a four percent neutral rate, a five percent tenure yield looks pretty reasonable.

Yeah. I mean to me, this is the last piece of the soft landing.

You're bringing the policy rate down to a more neutral level as inflation goes back to target, and you would expect the yelk curve to uninvert, which has happened here. And I thought that, you know, eventually you'd have the policy rate somewhere in the threes and the tenure somewhere in the floors, and you'd have this nice upward sloping yelkurve, so that all seems to be developing. And you know, that's part of the soft landing narrative in my view.

When we heard from J. Powell and the fact that he's talking about they're not in a hurry. How much does that have to do with policy uncertainty that right now is coming out of mar Lago, but we'll be coming out of Washington, DC for twenty twenty five.

Yeah, I think the sense of not being in a hurry, if you think about this December of meeting that's coming up, there'll be a summer of economic projections at that meeting, and what the committee will do is various members will project out for twenty twenty five and twenty twenty six, how many more BRAT cuts they think, But it's not going to be that many, right because I've already made some and neutralism, you know, won't be as far away as it was.

And so then they'll say, well, you know, some people say.

I only need two more, or other people say I need four more or something. But they'll spread those out over twenty twenty five and maybe even over twenty twenty six as inflation is projected.

To continue to come down.

So in that sense, it will smooth out and people start talking about well, maybe once.

A quarter, maybe once every you know, every third meeting or.

Something like that would be the right pace, depending on how fast you think inflation is actually going to go down to two percent.

Right, So you're talking about inflation coming down to two percent, but some of these policies could be inflationary. We're talking about deregulation, we're talking about cutting taxes, and then there's this debate debate on how hi the walls are going to go up around the United States for imports coming from China or the European Union. If that's the scenario we have, does the FED need to think about potentially hiking.

You know, I think we've seen this movie before. In twenty eighteen, twenty nineteen. I didn't see much inflation coming from that. We had a corporate tax.

Cut late twenty seventeen. I didn't see much inflation from that. So I just I don't think that that's the right narrative for this. You know, that's not where the inflation is going to come from. Where it comes from is big fiscal spending. But if it goes straight into people's bank accounts the way it did in twenty twenty one, that's almost like printing money, and that ended up causing a lot of inflation.

But if we don't get something like that, and I haven't heard anybody talking.

About that, then I think other types of spending are probably not devils suspending, probably not as inflationary.

Jim.

That's a fascinating point, and it really goes to the heart of something that I've seen explored a number of research papers over the past few weeks, which is how we don't understand inflation, why the FED got it wrong and didn't raise rates as early as March of twenty twenty two in the face of real inflation, and going forward our understanding of what the read through will be

I mean, inflation's a monetary phenomen and that's why they call it monetary policy. And it's the job of the FED, especially to keep inflation expectations under control. So you could argue about an inflation expectations channel here.

If people start to worry.

That the Fed's not going to do its job, that would be as serious concern I.

Think for the inflation outlook. But tariffs themselves kind of a double edged sword.

They sure they rearrange the prices somewhat, but they also changed demand for the important good and you've also got what's the reaction of the foreign.

Country going to be.

So a good outcome would be is that you get serious here and you tell the rest of the world, which is pretty protectionists. You tell the rest of the world you know, the US is going to play tougher here.

And we want you guys to lower your tariffs, and those guys could say, hey, well.

You know, we agree, and we're going to lower our tariffs, so you get just a lower tariff environment or the whole thing. That would be very consistent with sort of the Trump negotiating sort of view of the world.

Jimmy won't ask you for your favorite Trump Treasury Secretary. We'll let you go. Thomas and Lewis FED President Jim Jim appreciate your time, so thank you.