Regional President Speech

Search Site Home > Newsroom > St. Louis Fed's Bullard Discusses Monetary Policy and Commodity Prices 5/6/2011 LITTLE ROCK, Ark. – Federal Reserve Bank of St. Louis President James Bullard delivered remarks titled “U.S. Monetary Policy and Commodity Prices” at the Arkansas State Banking Department’s “A Day with the Bank Commissioner” event today. Bullard said that, based on leading economic research on oil shocks, the current surge in oil prices does not seem to qualify as an important macroeconomic shock. In addition, he discussed headline and core in ation and stressed that the key policy goal with respect to prices is headline in ation rather than core. With respect to monetary policy, Bullard said that “higher in ation expectations in conjunction with a zero policy rate amount to an easing of nancial conditions” and that “going on hold allows more time to assess the strength of the recovery.” Finally, Bullard brie y discussed the merits of commodity standards and in ation targeting, concluding that “in ation targeting is a better choice in the current environment.” Commodity Prices While there have been substantial increases in commodity prices in recent months, Bullard noted that energy prices cannot continue to increase inde nitely. “Still, some sector prices do continuously move in one direction for a long time,” he added, citing as examples prices for medical care, which have increased, and prices for computer technology, which have decreased. Bullard then discussed oil price shocks, citing James Hamilton of the University of California at San Diego, who has argued that certain types of oil price shocks precede U.S. recessions. Bullard said that “increases in oil prices like the ones we have recently experienced have occurred many times in the past without seeming to have much effect on the economy,” and that “it is only the really extreme ones that are reliably related to U.S. recessions.” “This gives me some con dence that the U.S. can weather the current price shock without a signi cant slowdown,” he added. Core vs. Headline In ation Bullard discussed headline and core in ation measures, which refer to overall price index measures and measures without the food and energy components, respectively. He said core in ation is often smoother than headline in ation, but “the ‘core’ concept has little theoretical backing” and is “very arbitrary.” “Headline in ation is the ultimate objective of monetary policy with respect to prices,” Bullard said, noting that these are the prices that households actually pay. “Core in ation is not an objective in itself,” he added. “The only reason to look at core is as an indicator for headline.” However, “from 2003-2006, core in ation was consistently below headline in ation,” Bullard said. Core in ation averaged about 2 percent while headline in ation averaged about 2.9 percent for the Consumer Price Index (CPI) and about 2.6 percent for the Personal Consumption Expenditures (PCE) price index. He concluded, “Core was not a good indicator of headline during this period.” He added that “energy prices were rising and the economy was expanding” during those years. U.S. Monetary Policy “Since last summer, nancial conditions have eased considerably,” Bullard said, noting that the policy rate has remained near zero but expected in ation has risen. “To the extent expected in ation continues to rise, nancial conditions continue to ease,” he said. “Past behavior of the FOMC indicates that the Committee sometimes puts policy on hold,” Bullard said. “This gives the Committee more time to assess economic conditions.” He added that hold in the current environment would mean: the policy rate remains near zero; the “extended period” language remains intact; and the balance sheet remains at the level as of the time of the decision to go on hold. Commodity Standards and In ation Targeting Although commodity standards were last discussed in the 1970s when U.S. in ation was high and variable, Bullard noted that today, in ation is quite low. He added, “Tying the currency to commodities when commodity prices are highly variable is questionable.” While a commodity standard forced some accountability on the central bank, “it did not always work because governments sometimes changed the rate between the commodity and the currency,” Bullard said. “In ation targeting is another way to force more accountability to the central bank and anchor longer-term in ation expectations,” he said. “Make the central bank say what it intends to do, and hold the central bank accountable for achieving the goal.” “In this sense, in ation targeting is the modern successor to a commodity standard,” Bullard said. 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James Bullard (2011, May 5). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20110506_james_bullard

@misc{wtfs_regional_speeche_20110506_james_bullard,
  author = {James Bullard},
  title = {Regional President Speech},
  year = {2011},
  month = {May},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20110506_james_bullard},
  note = {Retrieved via When the Fed Speaks corpus}
}