Friday, July 24, 2009

James Bullard's lonely battle

James Bullard, president of the St. Louis Fed has been pushing to develop a plan to de-lever the Fed's balance sheet. He is concerned that without a transparent plan to start taking liquidity out, inflationary (including asset bubble) pressures may show up. His view doesn't seem to be widely shared within the Fed. From Bloomberg:

James Bullard, president of the Federal Reserve Bank of St. Louis, wants the Fed to adopt a plan for taming the inflation he expects may follow the end of the recession. Unless the central bank puts a strategy in place and presents it to the public, inflation expectations may run rampant, Bullard says.

The Fed's balance sheet doubled from a year ago. Here is what worries Bullard:

This chart shows the changes from a year ago in the Fed's balance sheet (in $ million). Note that something like Maiden Lane was put on more than a year ago (Bear Stearns), so it shows a small reduction between Jul-23-2008 and Jul-22-2009.

Source: The Federal Reserve

A number of people outside the Fed are skeptical about the Fed's ability to start taking stimulus out on a timely basis.

From Bloomberg:
Meltzer is skeptical that Fed policy makers will act, even if they figure out how. In the 1960s and 1970s when inflation was rising, the Fed set out goals to fight it at least four times only to back down under political pressure. Paul Volcker, who became Fed chairman in 1979, was the exception. He ignored politicians and pushed the benchmark fed funds rate as high as 20 percent in the early 1980s.

Bullard's concern is that even the perception that the Fed lacks the will to fight inflation may create problems, including potentially the worst possible outcome - stagflation.

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