The Federal Reserve: Recent History & Monetary Policy with Former St. Louis Fed President James Bullard

>> James Bullard: Bernanke was a democratizer. He wanted the committee to provide input. And I think the best way to understand Chair Bernanke is that no one is more intellectually secure than the Nobel Prize winning chair. So he wanted input. He wanted to hear what different people had to say.

It didn't bother him if they said something that was counter to what he was thinking. He would certainly take it on board or dismiss it as he saw fit. So I think once that democratization took place, then that was inherited by Chair Yellen and Chair Powell. So it's really the same way today.

I don't think you could run it the same way Greenspan ran it in the current environment. I think it's a different kind of committee today.

>> Jon Hartley: This is the Capitalism and Freedom the 21st Century podcast, an official podcast of the Hoover Institution Economic Policy Working Group where we talk about economics, markets and public policy.

I'm Jon Hartley, your host. Today my guest is James (Jim) Bullard, who is the dean of the Mitch Daniels School of Business at Purdue University. Jim previously was the 12th president of the Federal Reserve bank of St. Louis, a position he held from 2008 till 2023. Welcome, Jim.

>> James Bullard: Glad to be here. Thanks for having me.

>> Jon Hartley: Well, thanks so much for joining us, Jim. You're a Midwest guy, you were born in Wisconsin, but you grew up in Minnesota. You did your BA at St. Cloud University and your PhD at Indiana University. How did you first get interested in economics?

>> James Bullard: When I was young, I had the vision of doing a sort of computer science plus economics as an undergrad, and that is my undergraduate degree. And I would say my career has kind of worked out. So I must have had rational expectations when I was young. But a lot of the work that I've done over the years in economics has been algorithms, solving macroeconomic models, talking about how expectations affect macroeconomics.

And a lot of that has had computational intensity to it. So it did turn out to be a combination of operations research or computer science plus economics. So that was the original vision. And then I went to graduate school and the rest is history.

>> Jon Hartley: Well, it's amazing.

Well, I feel like you're certainly, I'm sure, in the Midwest during the rational expectations revolution when that was going on. Certainly I think that pervaded a lot of those so-called freshwater departments. And Indiana as well, you had a lot of folks from, from the Federal Reserve System. I know Chris Waller was a professor there at one point.

I'm just curious, so you've had a long and quite amazing career in the Federal Reserve System and specifically at the St. Louis Fed. Before becoming president of the St. Louis Fed, you were the deputy research director there for many years. What is it like being a deputy research director at a regional Fed bank?

>> James Bullard: Well, I loved it, I love my whole tenure in the Fed, but I especially loved being on the research staff. We had a great research department with a long tradition dating way back was really the first research department to do academic style research in the Federal Reserve System.

And I was coming along much later than that. But then in addition we were able to build up the department even further as we, after I became president, Chris Waller was the research director for about a decade. So we had a, we really had a great run. And I thought, you know, I just learned so much economics from being at sort of a crossroads.

I would say a lot of the Federal Reserve banks with strong research departments like St. Louis are places where you pretty much see, sooner or later you pretty much see everybody who's doing something that's anywhere related to monetary policy or macroeconomics, which means most of macroeconomics. So I think it was a great chance to have colleagues that were interested in these issues and to be able to see all, you know, have a bird's eye view of all the work that was going on in the field.

>> Jon Hartley: I mean, the St Louis Fed, I feel like known for many things. One, it's known for being the home of Fred, which is how a lot of people download their macro time series now. And it's a great database full of tons of macro time series that anybody can access for free.

I feel like that's one really understated, incredible contribution from the St. Louis Fed and the Federal Reserve System in general. I guess you also had this other sort of part of the St. Louis Fed where I think it's just very well known for being very good on economic history.

And I know it's got it's Fraser database, it's got a bunch of things. I mean, it's also sort of got this link to monetarist economics, old monetarist sort of economics. I don't know if maybe Milton Friedman visited and I'm curious or maybe there were a lot of Milton Friedman students who had migrated to the St. Louis Fed over time.

I'm curious, what is the history behind the St. Louis Fed?

>> James Bullard: Yeah, well, a guy named Homer Jones was hired in 1958. Homer Jones was at Rutgers when Milton Friedman was a student there. And then they became long, long time friends within economics. And so later Homer Jones came to the St. Louis Fed and Milton Friedman was at Chicago.

So that's how the monetarist aspect of it got going. But I think it was more attitude that these were very difficult problems to understand the economy and understand monetary policy in a scientific sense. And so you're gonna have to get serious about from a research angle and you're gonna have to roll up your sleeves and dig in.

And that's very much what they did at that time in that through the 1960s and into the early 1970s. And so that kind of established the reputation of St. Louis Fed. But we're many years beyond that now. What I wanted to do as president is build on that.

Not claim that everything that they said was exactly right, but try to build on that and especially to carry forward the attitude that these are hard problems and they take a lot of work to try to solve them and you can only make a certain amount of progress on any given day because they're that difficult.

>> Jon Hartley: Yeah, it's fascinating. I mean, the history there is, I think, quite interesting, and worth thinking about looking into. I'm curious, so you became president of the St. Louis Fed in 2008. I mean, tell us, what is the selection process like for becoming a regional Fed bank president?

I know, I think the outgoing director or the outgoing president of that given regional Fed, I think, submits a few names to the regional Fed bank board, I think. I think people that are less familiar with how the Federal Reserve System works. You have these 12 regional banks in addition to the Federal Reserve Board.

The Federal Reserve board is in D.C. but each of these regional Fed banks is kind of like a quasi governmental institution. They have their own board of directors, and those boards of directors are responsible for choosing the president of that regional Fed bank. Now, like, what directors can actually choose and be part of that process has changed a little bit since Dodd Frank.

The banking, class A directors can't vote on presidents anymore. But I'm curious, what is that whole process like? And of course, these names I think, have to be approved by the Federal Reserve Board. And I think over time, the Federal Board has maybe played a greater role in more recent years.

But I'm curious, going through that process, as somebody who's actually interviewing to become a new regional Fed bank president, what is that whole process like? And who do you talk to? And, and like.

>> James Bullard: Yeah, you're right. Each of the banks has a board of directors, and these directors are business and banking leaders from across that particular district.

And we had some great directors that really did a great job for us while I was president of the bank and really helped us a lot. But when it comes time to choose a new leader, it's really up to the board to choose that new leader. Typically, they'll hire a recruiting firm.

They'll try to have a broad search, certainly a nationwide search, and then they try to make a good judgment about somebody that can be a leader in monetary policy, but also be a leader for the bank and manage the bank. I mean, the St Louis Fed, when I left, is right around 1500 employees and had plenty of work to do other than just the monetary policy and the research department. 

So there's quite a lot to manage at a high level. And the board of directors takes this job very seriously in trying to find somebody that can play both roles effectively. I would say that for St Louis in particular, I think the notion of carrying on the research tradition is very prominent.

And I'm sure that weighed on the board of directors when they replaced me. But one of the things that happened after Homer Jones and Milton Friedman, which is in the distant past, but the other banks then copied St Louis because St. Louis had a lot of success and they created their own research department.

So Minneapolis is one of the most famous ones. They had Tom Sargent visiting and Ed Prescott later, and Chris Sims, all of whom won Nobel Prizes. So Minneapolis, I would say, sort of copied the St Louis model. And then later all these other banks also produced powerful research department, San Francisco, Chicago, and many others.

So I think.

>> Jon Hartley: Richmond, Fed.

>> James Bullard: Yeah, Richmond, really all of them are pretty good right now. So now I think what you have is this very good research system across the Fed where the different banks can provide sort of independent input on these important questions. They come from different research angles and they might have different data, they might have different ideas.

And that joint process I think leads to very good leadership on the part of the Fed for intellectually, for pursuing great policy for the United States.

>> Jon Hartley: I think that the whole Federal Reserve System has changed quite a bit over time in the sense that, one, they become the largest employer, I think of PhD economists.

You have a couple hundred PhD economists at the Federal Reserve Board and hundreds, hundreds more throughout the system. But you know, it wasn't always the case that the Federal Reserve was run by PhD economists. I think in the earlier part of the 20th century, and maybe even through the middle of it, it was largely run by lawyers and bankers.

And it's interesting how the number of PhDs I think might have even peaked 10 or 15 years ago. And I think now there's fewer PhDs on the FOMC today than perhaps there was 10, 15 years ago. So I know there's always this struggle, I think, between PhD economists and lawyers in terms of vying for these sorts of economic policy positions.

But I'm just curious, as a regional Fed bank president, what is the routine like in terms of your interactions with the chair and the fed board in D.C along with other FOMC members? You're president of the St Louis Fed alongside three different chairs, Bernanke, Yellen, and Powell. And you're also staff under the Greenspan Fed and you were going to FOMC meetings in the Greenspan Fed era? 

I mean, did their styles change over time or with different chairs? Have styles changed quite a bit on the FOMC in terms of deference to other FOMC members? I mean, my understanding is that Greenspan kinda just moved and everybody sort of was prodded to kind of follow alongside what Greenspan wanted.

Whereas my understanding is over time I think it's become a little bit more democratic and deferential to different FOMC members. But when you go to these meetings every six weeks, I mean, my understanding is that some chairs have had, have made more of an effort to have one on one meetings with regional Fed bank presidents before the actual meetings happen I'm curious what is that experience like as a regional Fed bank president?

>> James Bullard: Yeah, I think the best way to understand it is that Greenspan was an imperial chair so he very much saw himself as the decider and the others as maybe weak advisors and that was very much the style. He would give his ideas about what should happen at the meeting he would give that first.

I think there was less emphasis on the future path of policy in the 90s and early 2000s than there would be today so that's been a major change. Yeah, definitely, very limited or almost no forward guidance. I think toward the end of his term, Greenspan, started experimenting somewhat but very carefully with forward guidance.

And then I would say that a major change occurred with Ben Bernanke becoming governor and later becoming chair because Bernanke was a democratizer. He wanted the committee to provide input and I think the best way to understand Chair Bernanke is that. You know, no one is more intellectually secure than the Nobel Prize winning chair.

So he wanted input, he wanted to hear what different people had to say and he didn't, it didn't bother him if they said something that was counter to what he was thinking. He would certainly take it on board or dismiss it as he saw fit. So I think once that democratization took place, then that was inherited by Chair Yellen and Chair Powell.

So it's really the same way today. I don't think you could run it the same way Greenspan ran it in the current environment. I think it's a different kind of committee today. And I also think that. So the other thing about Bernanke is it's all about transparency. And really the transparency revolution that got started a little bit under Greenspan really came to the fore under Bernanke.

And this means that the public and the global financial markets hear much more about what the debate is among members of the committee because committee members are talking pretty much all the time about how they're interpreting the most recent data, what they think about the future path of policy and all these things.

I've said that I think that's a fantastic thing because markets want to know what's the committee thinking. And what better way to do that than just have people doing interviews and various kinds of speeches and reacting to the latest data and shading their positions subtly in one direction or another on any given day.

So I think there's a lot more information out there and I think that creates better policy as opposed to global financial markets having to guess, do seven people think this or do five people think that are on the committee? They pretty much tell you in their speeches and in their interviews where they're at and how they're interpreting the last data.

And you can get a very good read on the committee most of the time through that process.

>> Jon Hartley: Yeah, and it's fascinating too. I mean over that time period under the Bernanke, Fed, you had things like the introduction of the SEP for guidance famous dot plots of where all the committee members forecast various macroeconomic variables like inflation, unemployment, but also where they forecast their own interest rate reaction function to be, I guess.

>> James Bullard: I mean the dot plot would have been considered absolutely outrageous in the Greenspan era, but came to be accepted as a kind of standard not just at the Fed, but even more so at some of the other central banks that did, in bank of England in particular published an inflation report ECB has a regular forecast round and publishes all that material.

So I think that kind of thing did not occur certainly under Greenspan, but that's part of the transparency revolution.

>> Jon Hartley: Absolutely, and even declaring that the Fed has a 12% inflation target, even though it's arguably something that tacitly happened in the 1990s and 2000s when all these other central banks started explicitly announcing various inflation targets, starting with the Reserve bank of New Zealand, and they famously came up the first central bank to declare their targeting 2% inflation.

And I think the bank of Canada and others followed quickly thereafter. But the Federal Reserve didn't officially or formally announce its 2% target until 2012. I mean, what were those discussions like in terms of that sort of transparency and officially adopting something that's pretty critical to the overall framework?

>> James Bullard: Yeah, I think inflation targeting really, as you just outlined, started in the early 1990s, but I think it was really the run up to the establishment of the ECB in 1998, 1999 and the years ahead of that, where an inflation target was talked about in Europe at length and finally decided to be famously 2% or less as the inflation target.

But that's a major central bank. The Fed didn't join immediately, but I think implicitly did join all through the 2000 and finally named a target in 2012. Now Greenspan opposed inflation target. He said he wanted flexibility. But that runs counter to what the literature was saying. The literature was saying exactly that you had to commit and so that markets knew what your target was, where you were heading, as opposed to the Greenspan notion that you didn't wanna tell them where you were heading cuz you might wanna go in a different direction.

But that idea has passed its prime and it's all about commitment to the target now. And Chairman Bernanke wanted to establish a target. He said so when he took the chair, but he didn't find the right moment to do it until 2011, 2012. And we worked on that during 2011, a group of presidents tried to draft a statement that would be a way to establish an inflation target.

And that statement got vetted with other presidents and eventually by Bernanke and by the Board of Governors. And that became in January 2012, the statement of long run. I forgot what it's called, long run objectives or long run goals of the committee. And, and that's the one that the committee will be revisiting here this year or next year, I guess next year.

And that's the one that established inflation targets. So I think that was an important development for the US and also informed decision making between 2009 and 2019, when inflation was actually below the target, as opposed to being above, which is where we usually were in the earlier era.

>> Jon Hartley: And since, yeah, I feel like the Fed's framework has evolved even further than that in more recent years. You have the flexible average inflation targeting framework review under Rich Clarita's tenure as vice chair. He played, I think, a pretty important role in that. I mean, you were president of the St Louis Fed during some very consequential economic times.

The Great Recession and the aftermath of it, as well as the COVID 19 pandemic and its aftermath. How did these episodes shape your thinking and what do you think the Fed did well over this period? What do you think the Fed should have done differently over this period?

>> James Bullard: Yeah, I'd say the global financial crisis was an unmitigated global disaster and it started on in US Financial markets. That's what was disconcerting about it. But not in the US Banking sector, really, the US shadow banking sector. And it was clear that we had a long way to go to provide better financial stability.

But I do that FED reacted. Well to that and has better radar today than we once would have had about potential for financial instability to develop. So I think that was a plus. I think the other thing that this brought up, the recovery from the global financial crisis was so slow and took so long.

That I think it raised a lot of questions about how to conduct monetary policy in an environment of extremely low inflation, extremely low nominal interest rates. I think we have a mixed record actually on being able to stimulate the economy all that well during that era. And we tried many different things, but it was okay.

I think it was moderately successful, but it was certainly not a brilliant success. And finally, the pandemic came along. I think the pandemic was such a big shock and a global shock that it was enough to knock us out of that equilibrium and into a new one, which I think is where we are today.

And this got me thinking a lot about regime switching as a way to think about what happened between 2009 and 2019. That there are two possibilities, at least, for the medium term outcomes in the US economy. One is a very low nominal interest rate, low inflation equilibrium. And another is a more normal, or what I would think of as a more normal equilibrium, with a higher real interest rate, higher nominal interest rates, and faster growth probably.

And I think that's a major challenge is to be able to think about what makes you switch between these two possibilities. And how can you conduct monetary policy knowing that those two possibilities are out there? But for now, I think we have probably been knocked out of the very low nominal interest rate equilibrium.

And now, I think the better comparisons are to the period from 2000 to 2007 or the period from, let's say, 1995 to 2000. I think those are better models for what could happen in the US economy now as opposed to the 2009 to 2019 period.

>> Jon Hartley: So I just want, I guess, maybe lightning around just a few questions just in general.

And I mean, you've had such an amazing and very long tenure on the FOMC and you've seen so many things. So I'm just curious that there are few general thoughts on a few different things. So one, you're going back to, I guess, the 2010s. There was this introduction of what one would call Delphic forward guidance, the SEP.

I mean, this is sort of you give contingent forecasts and contingent policy projections. Was that a good addition in your mind or one that I think one that should be revisited? I know there have been some critics saying that the regional Fed Bank presidents should actually be owning their dot.

And rather than sort of keeping it a secret or maybe adding confidence bands around projections, I think that was a Laura Adam Ester suggestion. Given that there's uncertainty with all these sorts of forecasts of GDP, unemployment, inflation, and the future path of policy. Was the addition of Delphic forward guidance, like the SEP, sort of overall good addition in your mind?

>> James Bullard: Generally speaking, I think it was a good addition, but as you may know, I've actually thought about, well, as president, to actually drop out of the dot plot. Because I think there are some inherent problems with it that just have not, the committee has just not been able to deal with.

So I guess my assessment is that the dot plot was introduced fairly quickly over a period of maybe two or three meetings. And I think the view was that, okay, if this doesn't work exactly right, we can make changes in the future. But instead, it got frozen into place, and so now you have this.

The dots are not connected, as you just pointed out. You can't tell which dot goes with which other dot for some other variable. I think the horizons are weird, you've got the horizon shortening as you go through the year so that the September meeting in particular only has a horizon of about 90 days.

So you're basically saying exactly what you think should happen at the next two meetings. I've always thought that was fraught for the committee if the data doesn't cooperate. And sometimes the data didn't cooperate and the committee got into trouble at the December meeting. So I think that's awkward, but all of this, the main thing I would say about this is all of this could be done better.

You could just have a quarterly monetary policy report and you just put out a forecast in that report, probably a staff forecast. And then let members of the committee say which parts of that forecast they agree with or don't agree with. That would allow for a more fulsome discussion of everything that's affecting the economy.

It could be 30 or 40 pages instead of this cryptic couple of graphs that we put out now. So I just think a lot could be done here. I think the committee's been frozen in place a little bit around this. It's probably better to have the dot plot than not.

The other thing about it is that not to ramble on too long, but another thing about it is that the statement of the committee is actually a product of the committee. So the committee has talked about this, and you alluded to this earlier. But the chair does go around and talk to everybody ahead of the meeting, which I think was a great innovation and makes a lot of sense.

It's a big, complicated meeting, you can't come into the meeting not knowing quite what's gonna happen. You have to have a pretty good idea about what's gonna happen. And I think that it helps that the chair can round up opinions ahead of time. But some that statement is a product of the committee, whereas the dot plot is a product of independent assessments that really isn't coordinated at all.

So sometimes the dot plot doesn't tell the same story as the statement. And then the chair is in a position of having to play down the dot plot or sometimes play up the dot plot, and this confuses markets. So I think that's been a source of sort of miscommunication at points.

And you really don't know what the dot plot is going to look like till the Friday before the meeting, so the chair doesn't have that great of an idea. So sometimes it has to be managed a little bit. I mean, it can all be done, but it could probably all be done a little bit better.

>> Jon Hartley: Any thoughts on the Evans rule, Odyssey and forward guidance? I mean, early on in the Great Recession, I think the Fed was really struggling with trying to push Down forward interest rates. And so you're really trying to get the Fed futures curve down several years out of the curve was something that the Fed was trying to do and I think was struggling with in various ways. 

I think it was sort of trying things like quantitative easing which I think did move maybe the 10 year rate by 10 basis points or so. But the Fed was trying to do more in terms of rather than just simply buying long term bonds. I think trying to signal that the future path of the Fed funds rate or the short term interest rate will be low for a very much longer period of time.

And that's kind of where some of this forward guidance SEP projections came in. But then there was also this move to introduce odyssean forward guidance which was time actually committing to a specific path based on some conditions. So for those that aren't familiar with what the so called Evans rule was this idea that was sort of announced I think in 2013.

That announced by the Fed that it would not raise interest rates from the zero lower bound, the short term interest rate from the zero lower bound. Unless unemployment fell I think below six and a half percent or inflation went above I think maybe two and a half percent.

And I know around that time and maybe it wasn't a direct result of the Evans rule. But I know that I think in 2013 maybe it was the August meeting that there was just a big effect on actually moving the forward part of the Fed funds futures curve down.

And I'm curious, I mean are you a fan of the Evans rule type of odyssean forward guidance? Is that something that you would be in favor of bringing back again in sort of another post great recession, prolonged recession, a slow recovery type scenario?

>> James Bullard: Yeah, I would say the Evans Rule is a form of state contingent forward guidance which I think is good.

The committee has struggled and continues to struggle with date dependent forward guidance versus state dependent forward guidance. So I think the natural instinct of many is to want to give specific dates. We won't do anything till March or we won't do anything till January or something like that.

And we really got in trouble in August 2011 where Chair Bernanke came into the meeting and it's in the transcripts. And I think the first thing he said was we're gonna have to do something different. So I'm going to propose that we promised not to raise rates until 2013.

And that was a date contingent signal and not a, that's saying that no matter what happens in the economy I'm not gonna do this. And I think that that's completely at odds with what any model will tell you. The model will tell you that you're trying to control a system with your get the best outcomes that you can with your control variable.

You're going to have to react pretty much continuously to the data that are coming in the same way that you would with a steering wheel on a car. You wouldn't say, I'm not going to turn. No matter what the road brings me, I'm not going to turn. That's going to put you in the ditch.

So you're always reacting to changing conditions and that's gotta be the spirit of monetary policy as well. And I struggled to get the community to get away from the instinct to want to provide date certain guidance. Markets tend to want the date certain guidance because they want to focus on other things that they're trying to do in financial markets.

But I think good policy suggests that you can't give it to them, so you should give them only state dependent guidance. And it hasn't helped that the committee is unable to write down a state contingent policy rule like a Taylor rule. Or some cousin of the Taylor rule that they'd be willing to think about and commit to.

And so because they haven't been able to do that, you sometimes get date based thinking comes to take advantage of the committee and sometimes causes problems. I think another case in point was June 2013. I just entered at that meeting, that's the Taper Tantrum meeting. So there I think the notion was that the committee was going to back off its unlimited quantitative easing even though the state of the economy was actually not consistent with that at that date.

So that came off as extremely hawkish in global financial markets. And real interest rates went up 100 basis points over the summer. So it really can be quite dramatic, these effects. And I think this is something that is very much a live issue for the FOMC going forward.

>> Jon Hartley: So state contingent for guidance over time contingent. Okay, so I'm very bad with running a lightning round here, but I'll try it again.

>> Jon Hartley: They're all-

>> James Bullard: Sorry, I'm rambling on too much.

>> Jon Hartley: No, these are all prescient questions and I feel like a lot of these deserve actually merit longer explanations and responses cuz they're complicated.

So flexible average inflation targeting, the idea that is sort of the Clarita kind of vice chair. Idea that we should be averaging inflation over a longer period of time, not just trying to hit 2% year over year. But that there should be maybe some look back window. And of course, this was all introduced well before the early 2020s inflation.

And the idea is, some have said it should be an asymmetric type of target. And the idea was at some level to allow for some overrunning of 2% at the time, and here's good idea or bad idea, should it be scrapped. There's a lot of critics of it.

>> James Bullard: Yeah, I think the core issue is if you want to conduct monetary policy and inflation is generally pretty close to target or above target. We have most of the research in the last 25 years has been devoted to that case. And in that case, I think it's fine. 

You say, well, depending on how the real economy is performing, depending on where inflation is, you could probably come up with a setting for the policy rate that would be appropriate. And in a lot of models that would even be optimal policy. The question is when you get to a very low interest rate economy with very low nominal interest rates, even negative nominal interest rates, which we had in Europe and around the world.

That some huge fraction of government debt issued between 2009 and 2019 ended up being negative nominal interest rates, unheard of before this all happened. When you're in that kind of situation, you can't lower the policy rate any further. So you're doing these other types of policy with questionable effects.

And so it's not. Clear that you can get back to your inflation target. And you just get stuck at an equilibrium as closer to 0% inflation than it is to 2% inflation. Is that a problem? And that's maybe the first question. And then the second question, if it is, it's certainly a problem in the sense that you're not hitting your inflation target.

So just from a credibility point of view, it's not very good and you're not providing the stability about nominal income that you'd like to provide. So how to conduct monetary policy in that circumstance, I think that's the question. And this flexible average inflation targeting was definitely designed with that scenario in mind.

And I think the committee still has to say, and all central banks still have to say to be really good. They have to say what would they do in that situation? And then if it's high inflation, then we'll consult the playbook that we inherited from Paul Volcker and we'll raise interest rates sharply and we'll get inflation to come down.

That happened just in 2022 up until now. And so all of that seems to work fine. The question is what do you do in this other situation? Or how do you stay out of that situation? That's another good question to continue to ask. So we've got ways to go on these issues.

>> Jon Hartley: Speaking of the early 2020 inflation, this is my next question. We got this big inflationary spurt in May of 2021, April, May, June 2021. And at first it seemed to be just used car prices. By October it was pretty clear, it was pretty broad based, hitting housing and a bunch of other areas in the consumer price basket.

But the Fed didn't ultimately start raising interest rates until March of 2022. Should the Fed have started to raise interest rates earlier in your opinion and was like so called team Transitory wrong?

>> James Bullard: Yeah, well, Team Transitory was definitely wrong. So I think we did do things in the second half of 2021 that I think were a tightening of monetary policy, but they don't show up as actual increase in the policy rate.

What happened was that as of let's say, July 1, 2021, the horizon for how long we would continue quantitative easing and how long we would keep the interest rate at 0 was incredibly long. It was like because the committee was expecting the recovery from the pandemic to look like the previous recovery in 2009-2019.

So that one took 10 years. And so they were kind of thinking, or we were kind of thinking that that would be you know, that's the template for the post pandemic economy. Now, if you look at it today, there's probably nothing so V shaped in all of macroeconomics as what happened after the pandemic.

And so that kind of mentality, which was that very slow recovery, that was all wrong. And it was starting to become apparent, I would say by the summer of 2021, but, but certainly became apparent in the second half of 2021. So we did start reeling back in the very long time horizons, instead of saying zero interest rates out to 2024, maybe only till 2023, maybe only eventually, only to 2022, and then eventually we did raise rates.

I think the other thing that's really instructive about this episode was that the very sharp increase in the policy rate in 2022 was a very successful policy that was, you know, 475 basis point increases in a row with more to follow after that, eventually to a policy rate of 5 and 3,8, which was considered unthinkable even nine months earlier.

So I think that is exactly the moment where inflation started, stopped rising and started falling. And I think it's that credibility effect, the fact that the committee was able and willing to say that it was going to defend the inflation target. And so you better take this on board if you're out there in the private sector.

And the private sector did take it on board and the inflation ended very rapidly compared to other inflations that we've seen and before there could be a recession. So I think this is a template for how to do this in the future. This is all about credibility and Fed policy and very little about the mechanics of, let's say, supply side disruptions.

And let me just say one other thing about supply side disruptions. So for those that are listening here and are thinking of aggregate supply demand diagram, what they're doing in their minds is shifting that aggregate supply curve to the left. And so output went down and prices went up.

That's fine, I suppose, but if you think that's all that happened and the supply curve went back to normal, then the prices would have had to fall. And that didn't happen. The price level never fell, it just kept going. It either went up or it stayed at the higher level.

And so I think it's strained. A strange version of that story is to say that the only thing that happened was that there was supply disruption and then the supply disruption went away. There has to be much more to the story than that. And that's why I think a big component of what happened was the demand side component.

>> Jon Hartley: So I want to talk a little bit more about just research in general. You're a great academic and great scholar on top of being a great policymaker. You did a lot of research during your time at the St. Louis Fed. I'm curious, part of what you oversee is deputy research director and president are all these models that the regional Fed bank builds and maintains.

Often there's a house DSHE model which has considerations about welfare and often has things like prices and Phillips curve and so forth, three equation model. And then you also have vector auto regressions which are kinda a theoretical and are really just correlational and don't have too much economic intuition.

I'm just curious, you know, how do central bankers and policymakers actually use these in your experience? I mean on this podcast we've spent a lot of time talking to central bankers and macroeconomists and I think one recurring theme that's come about is that I feel like central bankers often don't necessarily seem to find a whole ton of value in DSG models.

I mean vars typically produce better forecasts, albeit less, you know, they have less economic intuition. But I'm just curious, obviously, maybe some more research oriented monetary policymakers may sort of think about the models a little bit more deeply, especially if they were the ones that kind of developed that initial research like folks like Rich Clarita.

But my understanding, my sense is that there's a massive subsidy toward this kind of research that goes on at the Fed, but there isn't a whole lot of usage out of it. I mean, you can see in sort of academia there aren't a ton of people that work on three equation and Kinsey DSG models, at least compared to how many did 30 years ago.

I'm curious, what's your take in terms of what are the things that researchers. That the, in the Federal Reserve system, the central banks actually should be working on. I mean there's a lot of really cool innovations out there, like I think, GDP now. Now casting, I mean it's been a huge contribution that's been made by the Atlanta Fed and the New York Fed.

I'm curious, what are the sorts of research functions that you think research teams should be focusing on more and which things do you think they should be focusing on less?

>> James Bullard: Yeah, I would say post 1980s era has been characterized by a sort of a big debate between people that just wanted to use data based empirical results and make policy based on that versus other people that said you can't make any progress without more specification of what you think is going on in the model.

And the outcome of that debate, there was all this identification literature in the VAR literature that said that there's really a model line behind your empirics and what is that model. And I think that all kinda led to the conclusion that there's really no substitute for a structural model.

And even if you say you don't have a structural model model, you don't want to have a structural model, you still have one in the back of your head that's guiding everything that you do. So might as well write that down and make that explicit. And so that whole line of thinking one carries the day.

I still love the ARS because I like simple characterizations of the data and I understand that they're not totally right and they don't always take care of everything that you need to take care of in order to make an inference. And that's okay with me, but I think in good hands for people that understand all those issues.

I think you still want to get some sense of where the data is and that guides you into thinking about what the next steps in your structural modeling might be. As for where the direction of future research is and I think is very timely today it's all about heterogeneity and I think the idea that you can simply abstract from the income distribution or the wealth distribution or the consumption distribution is too much.

And to really understand the economy and the effects of monetary policy, you really need to understand that entire distribution. I would say that those issues are wide open. I wouldn't say there's any model that is a clear victor on that, but I actually have some research of my own on this.

So those that are listening wanna look at it. It's in a volume called the Future of Macroeconomic Policy, sponsored by the IMF and the Reeks bank in I'm sorry, the Norwegian Central Bank. And that paper makes an argument that a lot of the standard things that we do in macroeconomics and that we recommend in macroeconomics would extend to a world where you have realistic Gini coefficients for income and wealth and consumption.

So it's an argument that we're not that far off as far as where we need to be in terms of macroeconomic policy. I'm sure there's refinements that could be made, but the kinds of things that we do really do make a lot of sense. Even when you have heterogeneity among households.

>> Jon Hartley: That's fascinating and amazing to hear about your research and some of your early research on heterogeneity. Heterogeneous agents is certainly a huge topic right now in macroeconomic research, along with, I think, relaxing some of those full information, rational expectations, assumptions, and so forth. I'm curious, just pivoting a little bit, what's it like now being a business school?

Dean at Purdue? Purdue is very unique. It's a very unique place in terms of has a lot of disciplines. It's got a famous flight school. You've got a lot of engineering, a lot of fantastic business and management courses. Curious, what differentiates the Ms. Daniels School in Purdue in your mind and what are your key objectives Dean?

>> James Bullard: Yeah, the the engineering school at Purdue is number four in the nation. So it's MIT, Stanford, Berkeley and Purdue according to the some rankings, some of the most recent rankings. So but Purdue turns out more more engineers than anybody in the country this year. So I think the strength is all in technology.

My story has been that technology ate the business world a long time ago. And so what you need to do for the business school here going forward is to integrate technology in business so it's tightly integrated. It's one in the same thing to think about what's the latest technology that could disrupt businesses in the future, but also to have the engineers know basic business principles so that they can take interesting ideas and take them all the way to market and be successful.

So I think that sort of business and technology integration is going to be very promising for the Daniels School here going forward. And so hopefully we'll be able to carry that forward and have lots of great students that come through our program and are able to make great contributions in the business world, so we have a lot of that already, but I think we can take it to an even higher level.

So I'm looking forward to working on that.

>> Jon Hartley: Well, it's exciting following everything that's been happening in Purdue. And I've met with President and former Governor Mitchell in the past, and I know he was a very transformative president for Purdue, and I think it's wonderful to see that he's the namesake for the business school that you're now leading.

A real honor to have you on, Jim, and it's amazing to hear about your career and ideas. And you're wonderful what you're doing at Purdue. And I think combining engineering and business is brilliant. You think about CEOs like Jensen Wong and Elon Musk. There are engineers and CEOs.

I think that's a terrific direction to take Purdue. And really amazing hearing about your incredible career at the St Louis Fed. Really want to thank you so much for joining us.

>> James Bullard: Well, thanks for having me. This has been very fun, and thanks for doing the podcast, it's excellent.

>> Jon Hartley: This is the Capitalism and Freedom, the 21st Century podcast, an official podcast of the Hoover Economic Policy Working Group, where we talk about economics, markets, and public policy. I'm Jon Hartley, your host. Thanks so much for joining us.