A Conversation with Federal Reserve Bank of St. Louis President and CEO James Bullard

Policy Context and Uncertainty

• Federal Reserve decisions are currently secondary to epidemiological variables, as the central bank lacks expertise in tracking viral spread and impact.
• Public health models have shown a "mixed track record" in accurately predicting outcomes, partly due to an inability to account for dynamic private sector human behavior.
• There is ongoing research attempting to integrate epidemiology with economic modeling, though Bullard remains skeptical that any current model can predict the environment accurately.
• A significant "resurgence" of cases in states like Arizona raises questions about the sustainability of current reopening efforts.

Economic Adaptation and Output

• Initial fears of catastrophic economic collapse were overstated; Q2 2020 actual output is projected at approximately 90% of a normal quarter's potential despite widespread shutdowns.
• Remote work capabilities and mobile technology have significantly mitigated the decline in economic production.
• Essential businesses, such as grocery stores, have successfully adapted operations to mitigate worker and customer risk.
• Bullard anticipates a permanent shift in certain sectors (e.g., movie theaters, indoor dining) where business models will require structural changes, potentially resulting in higher costs and reduced capacity.
• The Fed faces a dual mandate challenge: stabilizing viable businesses that will return to normal while preventing the economy from freezing outsectors (like airlines) that may permanently shrink or change.

Long-Term Economic Outlook

• Bullard projects that life four years from now will resemble the pre-pandemic status quo, though acknowledges the possibility of more permanent changes.
• He argues that the economy has adapted to other steady-state mortality risks (e.g., car accidents) without a permanent reduction in long-term output standards.
• The Fed is moving away from a strategy of waiting for a vaccine to restore normalcy, instead planning for the disease to circulate in the economy for the foreseeable future.
• There is a risk that necessary mitigation behaviors to control the virus could permanently dampen economic activity by reducing the availability of valuable services (e.g., travel, business conferences).

Racial Justice and Monetary Policy

• Bullard states that the ideal labor market outcome would be statistically no difference in unemployment rates across racial and ethnic groups.
• He notes that Black and Hispanic unemployment rates have historically been higher than white rates, a gap that had been narrowing prior to the pandemic.
• Bullard agrees that extending economic expansions is a primary driver for reducing racial unemployment gaps, though he acknowledges this is tied to the dual mandate.
• He has historically criticized an over-reliance on the Phillips Curve, suggesting the Fed may have been "not easy enough" on inflation targeting in the post-2012 period, potentially exacerbating employment shortfalls.
• Despite the dual mandate, the Fed has not explicitly redefined its inflation target as a racial justice imperative, though Bullard admits they were "sympathetic" to the idea of defending the target from the low side.

Inflation and Global Comparisons

• Bullard expresses concern that inflation expectations may remain below the 2% target, exacerbated by market shutdowns and distorted price data.
• He suggests European nations (including the UK) have been hit harder than the U.S. in terms of fatalities and hospitalizations, with less fiscal flexibility and central bank coordination (ECB).
• Bullard warns that without robust fiscal and monetary support, the U.S. faces a risk of depression, which would worsen both health and economic outcomes.

Institutional Transparency and Communication

• Bullard views increased public attention and scrutiny of the Federal Reserve as a positive development for a democracy, noting a "transparency juggernaut" since the Alan Greenspan era.
• He argues that a large committee structure (FOMC) benefits public understanding by allowing diverse nuances in discussion, contrasting with the opaque decision-making of the 1980s.
• The Fed's expanded balance sheet and new tools (13-3 facilities) to support liquidity require clear public explanation to maintain legitimacy and prevent financial crises.
• Bullard asserts that the primary goal of aggressive current policies is to prevent a secondary financial crisis on top of the pandemic-induced recession.