Bullard Says Fed Is Limited in Its Ability to Affect Labor Markets
By Michael S. Derby
St. Louis Fed leader James Bullard appeared to take issue with the central bank’s latest move to provide increased monetary policy guidance, saying in a speech Wednesday the Fed is limited in what it can do to affect labor market conditions.
The best and most effective thing the Federal Reserve can do is focus on its traditional mandate of inflation control, the official said. “Frontline research suggests that price stability remains the policy advice even in the face of serious labor market inefficiencies,” Mr. Bullard said. “This research should provide the benchmark for contemporary monetary policy,” he explained.
At the same time, “the current high level of unemployment is causing some to suggest that the [Federal Open Market Committee] should put more weight on unemployment in its decision-making process,” he said. That would be a mistake, as research shows “monetary policy alone cannot effectively address multiple labor market inefficiencies…. One must turn to more direct labor market policies to address those problems,” the official said.
Mr. Bullard is a voting member of the monetary policy setting FOMC. His comments came from slides that were associated with a talk he was to give at a conference held by the Levy Economics Institute of Bard College, in New York.
Mr. Bullard has long argued that monetary policy faces limits in what it can do to aid the labor market, and he has said if the Fed were to target achieving a given unemployment rate, it could lead policy to go seriously wrong. But he also gave his qualified support to the Fed’s decision last December to job and inflation thresholds.
The Fed said then that it would keep short term interest rates near zero percent so long as the unemployment rate is above 6.5% and expected inflation is below 2.5%. Officials have been careful to note these levels aren’t targets and don’t promise immediate action if breached. Some have said the Fed could easily keep rates unchanged with a sub-6/5% unemployment rate if inflation remained under the threshold.
Mr. Bullard’s comments Wednesday appeared to reflect an ongoing discomfort with this new policy regime, one that is unlikely to bring a rate hike for several more years if the Fed is right about how the labor market will perform.
In his prepared remarks, Mr. Bullard said the Fed has over recent years done a good job of keeping inflation near the central bank’s official target of 2%. He said the unemployment rate “remains high” and compared to its current 7.6% level, it will likely be in the “low 7% range” by year’s end.