In a speech on Wednesday morning, titled “Some Unpleasant Implications for Unemployment Targeters,” Bullard said that the unemployment rate remains high by historical standards after falling about 0.7% per year from its post-recession peak level. The move signals that the end of the easing and bond buying by Ben Bernanke and the Federal Reserve might not come as soon as many bears are expecting.
Bullard said that the unemployment rate will be in the “low 7 percent range” by the end of 2013. The Fed has previously targeted 6.5% as its unemployment target before making real changes to the easing and stimulus. Where this gets interesting is that Bullard went on to say that research from economists Federico Ravenna and Carl Walsh suggests that price stability remains the policy advice, even as the market deals with serious labor market inefficiencies.
Bullard has even said that actual FOMC monetary policy during the past 18 years seems to have mimicked the New Keynesian policy advice, but that does not include unemployment. While Bullard said that other policy tools are needed but he was quoted as saying, “Attempts to address the various labor market inefficiencies solely with monetary policy do not work very well because improvements on one dimension are simultaneously detriments on other dimensions.”
The long and short of the matter is that the bond market and the equity market are both addicted to stimulus. If Bullard is suggesting a wind-down of bond buying and an end of short-term rates being at nearly zero, it sure does not seem like it would be immediately upon us, at least as long as inflation remains tame.
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