Brown on Business
March 2-8, 2020
By Wesley Brown
wesley@dailydata.com
Arkansas-tied St. Louis Fed seen influencing U.S. monetary, interest rate policy
Even after covering and writing about the U.S. economy for more than 25 years now, listening to an economist explain the dynamics of U.S. monetary policy can still leave one’s head spinning in confusion.
That said, one of those foremost economic experts I have had the pleasure of interviewing several times and then try to explain to my readers what he said is St. Louis Federal Reserve President and CEO James Bullard. As CEO and chief economist for the expansive Eighth District that includes all of Arkansas and six other states, Bullard oversees one of 12 regional Federal Reserve districts across the U.S. that make up the nation’s central bank.
Within the Federal Reserve system, the powerful Board of Governors governs the nation’s banking system from the Eccles Building in Washington, D.C. The seven members, or “governors,” are all nominated by the sitting president and confirmed by the U.S. Senate to serve 14-year terms. The chair and vice chair of the Fed are then named by the president from among the sitting members. Although former Fed Chair Janet Yellen stepped down to make way for Trump appointee Jerome Powell exactly two years ago, board members can only be removed by the president “for cause” unrelated to U.S. monetary policy.
All members of the Board of Governors also serve on the influential Federal Open Market Committee (FOMC), which sets U.S. monetary policy to promote the stability of U.S. financial markets. The FOMC includes the seven governors; the president of the influential Federal Reserve Bank of New York and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis.
Since becoming president of the St. Louis Fed in April 2008, Bullard made a name for himself by introducing a new approach for the St. Louis Fed’s near-term U.S. macroeconomic and monetary policy projections. That economic theory is based on the idea that the economy may experience one of several possible persistent regimes, which involve a combination of recession or no recession, high or low productivity growth, and high or low real returns on government debt. While switches between regimes are possible, they are difficult to forecast.
Bullard’s view, which often trickles down to St. Louis Fed branches in Little Rock, Louisville, Ky., and Memphis, contrasts with the more traditional approach to monetary policy projections, which assumes that the economy will converge to one single, long-run steady state.
At an economic conference at the Clinton Library in late 2017, Bullard first warned Arkansas business leaders and bankers of a possible U.S. downturn ahead of the confirmation of Powell by President Donald Trump. At the time, the noted economist said the traditional method of hiking short-term U.S. interest rates put the nation’s economy at risk of a “yield curve inversion,” which he then called a precursor to a possible recession.
Since then, Bullard’s yield curve economic outlook has been closely watched on Wall Street as President Trump has grown weary of monetary policy under both Yellen and Powell, his own appointee. As a vocal voice and sometimes lone voice against the Fed’s ongoing policy of steady interest rates hikes in recent years, Bullard was approached last summer by the Trump administration to take a job as a Federal Reserve governor, which would allow him to influence Fed policy over a 14-year term.
Even as Trump has called for Powell to resign and had difficulty seating Fed candidates friendly to his low interest rate quest, Bullard’s economic views have often sided with White House economic advisers who want the FOMC to continue cutting interest rates to boost the economy and tepid Gross Domestic Product (GDP) growth.
Meanwhile, Bullard continues to push his dovish forecast in the coming year as U.S. economic growth slowed in 2019. In a presentation Feb. 11 to the CFA Society St. Louis, Bullard discussed whether or not the FOMC can bring the world’s largest economy in for a “soft landing” after the committee cutback on interest rate hikes in the past 12 months.
In the face of slowing GDP growth and the constant berating of Fed policy by President Trump, the FOMC made three successive cuts to the federal funds rate by 75 basic point, bringing U.S. interest rates to a current age of 1.5% to 1.75%. In a FOMC report submitted to Congress on Feb. 7, the influential panel said it will continue to monitor the outlook for U.S. economy as it assesses future interest rates.
Bullard said three additional factors remain if the U.S. economy is to avert a crash landing that could push the nation into the first downturn since the Great Recession of 2009. “One question for 2020 is whether global trade policy uncertainty has sufficiently been dampened to now encourage global manufacturing,” said Bullard.
“Another question is whether interest-sensitive sectors in the U.S. will respond to the 2019 change in U.S. monetary policy,” Bullard add. And the third question, he said, is whether the coronavirus outbreak in China is likely to be contained as other viral outbreaks have been.
“The answer to all three questions is, ‘Let’s wait and see,’” he said.
Despite his Trump-friendly views, Bullard has refused the president’s entreaty to sit on the Fed’s Board of Governors. Instead, Trump on Jan. 28 formally nominated the St. Louis Fed’s second-in-command Chris Waller and Bullard’s top adviser to fill a currently unexpired term ending Jan. 31, 2030.
“We’re thrilled that President Trump has nominated Chris Waller to the Board of Governors. Chris is an outstanding economist with a long macroeconomic research record and deep understanding of the Federal Reserve, FOMC and economy,” Bullard said in a statement. “If confirmed, he’ll be an excellent governor and voice at the policy table. On behalf of all of his friends and colleagues here at the St. Louis Fed, we wish him the very best.”
Waller faced his first volley of questions on Capitol Hill on Feb. 20, making his appearance before the U.S. Senate along with former Trump economic adviser July Shelton as President Trump’s most recent Fed nominees. If confirmed by the U.S. Senate, Waller would join his former boss on the central bank’s FOMC committee and put two Eighth District forecasters on the influential committee that holds sway over the U.S. economy.
Even more intriguing is the question of what happens to Powell if Trump is re-elected. Although the Fed chair does not serve at the pleasure of any president, many believe that Trump’s president first action at the start of a second term would be to fire Powell and throw the nation’s central bank into a fray. The question of can a president legally fire a Fed chairman has never been tested, but Trump has often fantasized on Twitter about what would happen if he went down that road.
If Powell was to retire or his dismissal upheld by the U.S. Supreme Court, it is highly likely that the influence of the St. Louis Fed and its band of economists, would likely grow. That certainly makes Bullard’s or Waller’s next visit to the Natural State a lot more interesting.
CHANGE, CHANGE, CHANGE!
If you have noticed lately, the Daily Record is undergoing some substantive changes in news coverage and content. Besides fresher local news and content on the real estate sector and legal community, we have revamped our staff of contributors to include several longtime Central Arkansas reporters and a few new writers with varied reporting skills.
We have also added some new content, including our Daily Briefs section, a monthly real estate market report, and our DR Conversations, where we sit down and quiz top executives and leaders in business, government and the nonprofit sector. Kudos to reporter Kim Dishongh for chasing down Gov. Asa Hutchinson, Arkansas 46th governor, for her first Q&A this week.
Going forward, we will also have dedicated weekly coverage of the real estate and legal community in Central Arkansas, which have long been the key niche audiences for the Daily Record since we first started in in 1923. We are also adding coverage of the nonprofit, healthcare, small business, government and banking/financial sectors, all key economic drivers of Central Arkansas. We are so working on a few other news features, so “Stay tuned!”
Here’s how you can help. Give us your feedback and let us know how we are doing. We are also looking for a few local guest writers who can contribute a monthly column to the Daily Record on these important business sectors and key issues of the day. As the new publisher, I will also be personally reaching out to local businesses to take a look at us and consider advertising with us as we improve our news coverage and content and continue to be Arkansas’ top resource for publishing legal and official notices. If you have any questions, please contact me at Wesley@dailydata.com or on Twitter at @BrownonBusiness.
