St. Louis Fed Chief James Bullard: Dueling With the Deflation Demon

James BullardFederal Reserve Bank of St. Louis President James Bullard has a flair for the dramatic. He's currently a member of the interest-rate-setting Federal Open Market Committee, so whatever comments he makes about the economy carry special weight.

And his writing of a document titled "Seven Faces of the Peril," in which he lays out two possible paths for the U.S. economy, is getting plenty of attention. Down one path, he argues, is the chance that low inflation married with low interest rates may lead to the kind of deflation that crippled Japan for a decade and is considered a threat to the Japanese economy now. The other possibility is that low interest rates fulfill the Fed's stated goal of increasing market liquidity and righting the economy.

Bullard's document is an enigma at its beginning for people who aren't schooled in the history of economics. He refers to an academic paper written in 2001 called "The Peril of Taylor Rules." The Taylor rules were first presented by John B. Taylor in 1993. It comes in the form of a complex mathematical equation that covers how central bank changes of nominal rates may effect GDP. That's too simple a description, but it captures the essence of the formula.

At the center of Bullard's thesis is that dangers exist on both sides of Fed easing:
"Promising to remain at zero for a long time is a double-edged sword. The policy is consistent with the idea that inflation and inflation expectations should rise in response to the promise, and that this will eventually lead the economy back toward the targeted equilibrium. But the policy is also consistent with the idea that inflation and inflation expectations will instead fall, and that the economy will settle in the neighborhood of the unintended steady state, as Japan has in recent years."
Bullard is clearly concerned about a renewed economic slowdown in the U.S., brought on to some extent by sovereign debt problems in Europe and a potential sharp drop in GDP there.

Bullard's views aren't particularly new or original. The debate over low interest rates or the purchase of long-term paper by the Fed as two alternatives are issues that are likely debated at each FOMC meeting. But Bullard is, perhaps, more concerned about the economy now than he was a quarter ago -- and who can blame him?

Increase your money and finance knowledge from home

Intro to Retirement

Get started early planning for your long term future.

View Course »

How to Avoid Financial Scams

Avoid getting duped by financial scams.

View Course »

Add a Comment

*0 / 3000 Character Maximum

15 Comments

Filter by:
Gumby

The health industry is notEXACTLY DEFLATINGq!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

July 30 2010 at 12:33 PM Report abuse rate up rate down Reply
knute9

Deflation? Do they mean the Chinese products are going to get cheaper, or that American workers wages and benefits are going to continue to fall due to competing with illegal immigrants in the blue collar labor fields? PS: Notice how the illegal alien problem rose at the same time as the identity theft problem. Let's face the facts, our government is protecting criminals, and the larger question is why.

July 30 2010 at 8:49 AM Report abuse +2 rate up rate down Reply
scottee

First, The Fed needs to be audited and ended.
they need to stop printing and diluting our dollar.
and they need to stop manipulating gold prices, stock prices and interest rates!

and since Japan is mentioned.
does everyone know that foreigners living and working in Japan legally need to have their passport and their visa on their person at all times? and they are not singled out unless there is a crime committed.

just like Arizona wants to do. Stand with Arizona!

July 29 2010 at 8:15 PM Report abuse +1 rate up rate down Reply
Gumby

We are deflating primarly because we are still waiting for someone to replace inflationary oil with something else like altenrare energy..

July 29 2010 at 7:14 PM Report abuse rate up rate down Reply
Gumby

We have deflation primarily becaue we hate oil!! Oil is limited which mean hat we have to cut back consumption and start to learn how to use different energy sources like fast! Deflation is temporary while we are busy making the switch !!

July 29 2010 at 6:44 PM Report abuse +1 rate up rate down Reply
golddbloon

Our government seems to wonder why more people do not want to put their money into the stock market. Well ,,, why would we want to put our money in a game where the odds are stacked so badly against us ? And I do emphasize the word "game". The stock market is little more than a large group of people playing a game, where they try to sell a worthless piece of paper to somebody for more money than they bought it for. So many stocks don't even pay a dividend anymore. And in those cases, the stock holder has little or no chance of sharing in any profit that the company might make. And if the company goes bankrupt, the stock holder can expect to get nothing for whatever shares they are left holding.

July 29 2010 at 6:10 PM Report abuse +2 rate up rate down Reply
1 reply to golddbloon's comment
Gumby

WE can reinflate anytime we want to but never again through oil prices because oil is a finite supply . We can inflate through other commodities like aluminium. Copper and molybdenum already inflated . Lumber , too. There is a difference in a snese that every commodity except oil is recyclable and almost inexhaustible. Sure you have to do harder work recycling those commodities. Oil is used once and you cant recycle it back from the damn smog!!! So please dont ever think of trying to sucker us into buying SUVS and PickUps and CEntral Air conditioning systems that do nothing but suck energy out of Earth.. We have no choice but to go altenerate energy route since we can always recycle the infrastructure and the sunlight is always renewable... the only remaining issue left for our deflation is that we have too many lazy butted asses sitting around pretending to be knowing what to do!!!

July 29 2010 at 6:08 PM Report abuse rate up rate down Reply
golddbloon

The Federal Reserve has caused the current recession, in part, by constantly tampering with interest rates. Constantly changing interest rates leaves people with a feeling of uncertainty, and causes them to have to gamble by trying to guess where interest rates will be in the future. This is true whether you are trying to borrow money, or trying to decide what kind of a cd to deposit with a bank. We need a stable economy, not a constantly growing economy. And we certainly do not need a gambling economy. The economy can only grow so much before something happens, like a recession or a depression. And part of a stable economy means being able to depend on things, like stable interest rates. Set interest rates at 6.25%, and leave them there ,,, forever.

July 29 2010 at 6:04 PM Report abuse +2 rate up rate down Reply
golddbloon

We are not having deflation. We are having very bad inflation. Local taxes and fees are going up, insurance is going up, and prices of items needed for daily existence, such as gasoline and food, have gone way up over the past few years. Yet our government refuses to admit that those things have increased seriously in price, nor do they count those things as part of the expenses of living in this country. Interest rates need to go back up fast.

July 29 2010 at 5:59 PM Report abuse +2 rate up rate down Reply
the2431

Problem is that consumers are not benefiting from the low rates, they are damaged
by low Credit Scores and thus are penalized, Banks still like high margin deals
and this means slow growth and high market risk !

July 29 2010 at 4:07 PM Report abuse +1 rate up rate down Reply