James Bullard delivered an interesting, chart-rich speech on inflation, QE2 and global output gaps on Thursday. (And yes, ‘interesting’ is all subjective.)
The now non-voting St Louis Fed President was a strong advocate of QE2 as a way to reverse alleged deflationary pressures. FT Alphaville noted in December that Bullard was keen to suggest that QE2 was just hunky-dory, impacting on key indicators as predicted.
He’s sticking to this line and has updated charts to back it up (headings his own):
‘Expected inflation increased’
‘Equity prices increased’
‘Real interest rates declined’
Which is all well and good until you factor in spillover effects and unless there’s something else going on in inflation expectations.
On those spillover effects, Bullard hits back at those claiming the Fed is importing inflation, saying — as Ben Bernanke did in Paris on Friday — that some “countries are choosing to import US monetary policy to some extent”.
But — and now we get to the really interesting (well, see above for the disclaimer) bit of the presentation — Bullard does wonder whether the US should consider ‘the global output gap’.
As John Kemp pointed out in his column on Thursday morning:
It is the first time a senior official at the U.S. central bank has acknowledged global capacity issues rather than a narrow focus on U.S. unemployment and capacity utilisation might give a better indication of where inflation is headed.
Bullard uses the following chart to suggest that “the global ouput gap is probably much narrower or even positive”:
It’s refreshing that a Fed President at least floats the idea that global capacity constraints could be a useful tool criticising the Fed for driving up global commodity prices.
But he’s also keen to point out that “this hypothesis is fascinating, but unproven” — which could also be said of QE2, of course.
Related links:
FOMC composition and future monetary policy – FT Alphaville
Maybe it’s working, and maybe it isn’t - FT Alphaville
A deflation refresher – FT Alphaville
Inflated expectations and spare capacity concerns – FT Alphaville