A Leader Emerges in Fed President James Bullard

Posted by Michael A. Kamperman on July 31, 2010

The GDP report was horrific.  It came in at 2.4%, well below month ago estimates.  What’s worse is it included a 27.9% rise in housing due to the bump in the home-buyers tax credit and it included a small positive contribution from state and local government spending.  The tax credit is gone and stimulus based state aid will soon fade away.  Also gone is the boost from inventory adjustments.  So where do we go from here…down.  The economy is clearly heading back down.  The President is too busy  campaigning and vacationing and doesn’t have the time to focus like a laser beam on jobs.  The Senate is a complete embarrassment.  This week the Republicans and the Democrats couldn’t agree on the procedural rules to move forward on a critical bill to revive small business lending.  Majority Leader Reed is so anxious to return to Nevada to try and save his seat that he was only willing to offer the Republicans a chance to vote on three of their amendments to the bill.  The Republicans balked and filibustered with both sides pointing fingers at the other.  Yet out of Ben Bernanke’s ‘unusually uncertain’  economic outlook and what to do about it emerges St. Louis Fed President James Bullard.  A man with a solid label as an inflation hawk is willing to step away from people’s perceptions of him and call it likes he sees it.  He sees the risk of the U.S. heading straight for a Japanese style deflationary trap.  He said the Fed may never hit its target of 2% inflation targets if the U.S. enters the trap.  An inflation Hawk says the facts have changed and he is willing to print money, soon.  When asked how he felt about raising taxes he said it wouldn’t be helpful to reviving the economy.  He has firmly placed restoring economic growth and avoiding deflation higher on the priority list than deficit reduction or current U.S. debt levels.  While not asked about federal spending it seems as though he would have given the same answer as he did on taxes, it’s not helpful to reviving the economy.

Bullard did more than just say quantitative easing was the best tool available to the Fed, he offered a game plan on how to use it.  He has come forward with the innovative idea the Fed should keep a close watch on the data meeting by meeting and adjust the level of quantitative easing based on the data.  Basically if things are looking up print less and if things are looking down then by all means print more.  He is willing to print as much as is necessary to prevent the slide into deflation.  I’m already on record stating the Fed will need to buy back virtually all of the outstanding federal debt, and perhaps much more, to restore the economy to full health.

What we need now is for a prominent Republican or Democrat to step forward and call it like it is: namely now is not a good time to either raise taxes or cut federal spending.  Its time to break with type-castes.  Its time to say the world changed in 2007 and both sides need a contemporary play book.  It probably won’t happen.  But with Bullard leading we may survive in spite of the partisans.  Monetary policy is an extremely powerful tool.  Paul Volcker brought the economy to its knees to battle inflation.  The Fed has an unlimited check book to throw at economic revival.  It has lacked the wisdom and the will, but Bullard just changed all of that.  Look for his strategy to be implemented much sooner rather than later.  If not by the election, then soon after.  Bullard has proven himself to be not just a leader, but a hero.