Welcome back. I'm Jeremy Saffron. Great show for you today. The chairman of the Federal Reserve stood up in Wyoming this morning and put five and a half years of inflation on his own institution. His words, "The responsibility sits squarely with the central bank, and that is where it belongs." Now, if you've spent years arguing the central bank is why your money buys less, that's about as close as you're going to get to hearing it said back to you. What he didn't say is what he's going to do about it. Look at markets. They decided anyway here a rate hike next month went from a long shot to the base case in about an hour. Now my guest today spent 15 years in that room. He once dissented because he thought they were moving too slowly. Stay with us.
All right. Jim Bullard ran the Federal Reserve Bank of St. Louis from 2008 to 2023. 15 years in the room that sets American interest rates. Now, the financial crisis, zero rates, the pandemic, and the inflation that came after it. In March of 2022, he dissented because he thought that the committee was moving too slowly. He wanted half a point instead of a quarter, plus a plan to start shrinking the balance sheet. Then, he published an explanation so anyone could read his reasoning, which is worth remembering this morning because the man who just spoke won't do that. He's now dean of Daniels School of Business at Purdue University. Dean Bullard, welcome to Kitco News.
I got to ask you, I mean, in plain English, did Kevin Warsh just prepare the country for a rate hike in September?
Yeah, market probabilities certainly shot up after this speech. He seemed to indicate that he is more open to a rate hike than was previously thought. I think he aligned himself with the center of the committee, I would say, all of which are hinting that they'd be willing to raise rates if inflation doesn't come down more than has been expected so far.
Yeah, well said. Just for kind of a live look here. I mean, the two-year Treasury yield jumped nine basis points. A basis point is 1/100th of that percentage. I mean the whole front of the curve went with it. The 30-year didn't move at all, still 5.1%. When he started talking, I mean, the market had September at around 36%. It's been climbing all morning and it's now close to about 60%. A cut is at, you know, almost zero. I mean, it doesn't feel like it's knee-jerk. It's been repricing in one direction for 3 hours. The currency, I feel like, did more than the yield curve today. I mean, euro down 1.6, yen approaching 160. Why is the dollar carrying this rather than the bond market?
Yeah, it's a good question. I think markets aren't sure what to expect in the medium term, but they are more inclined to bet on a rate hike in the short term. So I think that's the pricing that you're seeing on the dollar. I think there was maybe some worry that the combination of US monetary policy and fiscal policy was going to run away a little bit, and this speech helped contain that to some degree.
There was an interesting kind of quote, and I wanted to read this line to you just a direct quote. He said, "There is one signal nobody can miss. The responsibility for 65 months of sustained elevated inflation sits squarely with the central bank, and that is where it belongs." That's his quote. So five and a half years, and he put it on the institution. He also voted to hold on July 29th, 9 to 3, fifth hold in a row. To put that into the next rest of what he kind of said this morning, I mean, inflation is the central bank's responsibility. Employment is full. Financial conditions, in his own words, are not restrictive. So what is the case left for holding?
Yeah, good question. So I think, you know, some of the hawks like Beth Hammack have made the case, even this morning, that the data is already there. The committee is already saying that at the end of this year, the best they're going to be able to do on core PCE inflation is something very close to 3%. And that's going to be very similar to where it's been in December 2023, December 2024, and December 2025. So really made no progress across those years, and you have to get more restrictive if you're going to do that.
I've also made the argument that this is a good time to fight inflation, and I saw a little bit of that in the speech here where he summarized the real side of the economy as being relatively good, pretty strong growth, certainly the AI boom going on. You've got the labor market seemingly very close to full employment, certainly the unemployment rate very low by historical standards in the US. And so then he turns to inflation, and clearly that's not going so well. So I think the case for getting more restrictive is there, and it probably doesn't depend so much on hairsplitting about the data. Anyway, the committee could start in September or sometime in the second half of this year, and then they could see how the data come in and see if they wanted to make more moves going forward. So all of this is, I think, good news for markets. They were looking for a more explicit message from the chair, and they got it.
And I mean, to your point, if policy still isn't restrictive, is one quarter-point increase enough or would September have to, you know, begin a sequence? What rate actually becomes restrictive in this economy?
Yeah, I think that's a great question, and that's a little bit of the reason why this has been maybe a momentous sort of moment for the central bank, because if you start going in one direction, usually that means you go more in that direction. It doesn't have to be that way, but the committee would have to be prepared to go that way. And it sounded today like Chair Warsh had joined the rest of the committee with that view.
So then is September now a kind of a test of institutional credibility? If he holds after making this diagnosis, does a momentous kind of speech become an indictment of the Fed's unwillingness to act?
I don't know necessarily. You could hold, but it could be hawkish nevertheless, and you could be more or less signaling that you'd move at the October meeting or at the December meeting. You've also got the dot plot coming up here in September. And I think that the September meeting is ironically the meeting with the most forward guidance because that dot plot is saying what you're going to do by the end of 2026 on the funds rate. And so that's basically saying what you're going to do at the current meeting and at the next two meetings. And so that gives you quite a bit of very near-term forward guidance coming from the dot plot.
So I'm not quite sure what the plot will say. I think it will say probably one or on a hawkish side maybe two policy rate increases by the end of this year. Probably one, I would say, and then they could put that one at the October meeting or at the December meeting. So I think because of that kind of dynamic, it doesn't suggest that they have to necessarily move in September in order to be hawkish enough to put downward pressure on inflation.
I wonder if it kind of creates a trap, because if the dots show hikes, then obviously the Fed delivers the forward guidance you were just talking about that Warsh has said has failed. But if they don't, then they contradict today's speech. So which side of that contradiction do you think matters more?
Yeah. I actually thought maybe what he would do here is get rid of the dot plot because of the September problem, but he didn't do that. So I think, I don't know, I'd put 50/50 on that one. I'm not sure if I can weight which side would have the more risks.
Yeah. I have to ask you about this inside perspective. I mean, what does the room actually look like right now? The vote identifies obviously three. We got Hammack in Cleveland, Logan in Dallas, Kashkari in Minneapolis. The minutes say several participants wanted that increase, which, you know, might be those same three. Then Schmid, I think, just said this week he'd probably put himself in that camp. So from the inside, I mean, where does the committee center of gravity really sit?
I think the committee is split pretty much down the middle, so 10 to 9 or one way or the other. I think a lot of people that are sitting on the fence could be convinced to go either way. And I think the speech today recognized that and stated the case, which is basically the main case that the committee is making as a whole, which is just that the real economy is doing quite well, inflation has not come down, they may have to do more. There are temporary factors with inflation, but they don't look like they're going to dissipate fast enough to warrant the committee just staying on hold and not going a little bit higher.
And you published the framework and the reasoning behind your dissent. Warsh argues kind of the opposite, that publishing a reaction function misleads markets and ties the committee's hands. Is that legitimate flexibility, or does it let a chairman avoid ever being held to a standard anyone can identify?
Yeah, I think when he's complaining about forward guidance, I think that that is more about the very explicit forward guidance. If he had come out today and said, "You know, for sure we're moving in September," or "For sure we're not moving in September," that's overly prescriptive about what the committee will actually do. And at times, that has gotten the committee into trouble. Past chairs have sometimes said, "Well, we'll likely tighten at a quarterly pace" or something like that, and then continued on that path for a while, and sometimes the data doesn't cooperate with the planned pace of increases or decreases.
So I think he's rightly said that the committee should get away from that, but he went a long ways today to say that nevertheless you can still explain your reasoning, which is what the markets have been clamoring for. And so he hit a good sweet spot today, I thought.
Yeah, that's interesting. So is he kind of replacing that calendar guidance with regime guidance, telling markets the hierarchy of risks without promising, I guess, a path? And does that lower uncertainty or just raise the term premium because nobody knows the trigger?
No, I think I argued against calendar guidance consistently all the time I was on the committee, exactly because of that reason: that sometimes the data doesn't go your way, and now you get into a bind. You said you'd go one way, but the data is telling you to go the other way, and then you have to make a decision and surprise markets one way or the other. So I think he's right to say that you shouldn't be doing calendar guidance; it should be state-dependent.
He wants to also reduce the influence of hairsplitting data on tenths or hundredths on the inflation rate or something like that. I think he's had less success there. But there I would just say that markets are markets, and they're going to parse things right down to the smallest unit available. And I'm not sure you're really going to be able to get away from that part.
Now, Dean Bullard, I want to kind of go to this part of the speech I can't stop thinking about, because it's about a name he never said. In July, Warsh looked at rising long-term yields and effectively blessed them. He said markets were learning to play the ball, not the referee. Three weeks later, Scott Bessent looked at the same yields, said that they've gotten out of whack, and he intervened and bring them back to what he called an equilibrium.
And then this morning, Warsh said the Fed needs clear market signals, and I'm quoting him, "as unfiltered as possible," and then he listed them: asset prices, the dollar, the cost of credit, commodities, and specifically the prices and trading volumes of Treasury securities here. So meanwhile, from September 9th, Treasury at least doubles its long-end buyback from $2 billion to $4 billion per operation across the 10- to 30-year sectors. It came two weeks after the regular quarterly briefing where debt management changes normally get made, and the program was built in 2024 to support trading in older illiquid bonds.
There was no sign of anything broken last week. Bessent pointed at the level of yields instead—a program, I guess, built for plumbing, now aimed at price. And obviously, he pressed the Fed this month to make dollars available to central banks so Tokyo could defend the yen without selling Treasuries. I'm just curious: one man says the Fed needs the Treasury market unfiltered, the other keeps reaching for levers that kind of filter it. So I mean, is that ordinary debt management, or is it interest rate policy run out of the wrong building?
Well, I think, you know, the Treasury Secretary got a lot of pushback against that policy, but I do think you have to let the Treasury manage the debt portfolio the way they think is most efficient, and the Fed would just have to take that as input on what they would want to do. If you really thought that the Treasury was doing something that was inflationary, then that would require the Fed to push back against that. So hopefully it doesn't have to be some big battle between the Treasury and the Fed. I think that you can manage the debt policy without interfering with the Fed's 2% inflation objective and get to good results. So hopefully that's where we'll go in the future.
I appreciate Chair Warsh's emphasis on the idea that you want to take some signal from markets. You don't want to always be—I guess one way I've described this is that this is a dance between the private sector and the Fed, and you have to have the idea that it's going to be about 50% market, 50% Fed. But I think Kevin has argued that it's gotten out of kilter: it's like 90% Federal Reserve and only 10% market. So he wants to move it back to something that is in the middle, and I think that's appropriate. I don't think you want something that's so heavy-handed on the part of the Fed that the market doesn't do its own pricing.
That's an interesting—so if Treasury has become, I guess, a third dancer, if the balance is supposed to be 50 Fed, 50 private market discovery, whose share is Treasury taking when it suppresses duration at the long end?
Well, I mean, the Treasury is just managing the debt. It's really the Congress and the president that are borrowing a lot of money, and there I think the US does not have a good policy. You've got 6% deficits as far as the eye can see. It wouldn't be so bad, the level of debt that we're at, but there seems to be no concern at all in the political system to curb those deficits. And now you're looking at probably divided government coming up. That historically has not meant that anything can get done.
So you're really in a—I think global markets are really scratching their heads here about what the US policy is. But as far as the Treasury is concerned, that decision's been made politically to borrow a lot, and they have to arrange that borrowing as best they can. And the Treasury Secretary wanted to make this move. That's certainly up to him, but they have to do the best they can with the hand they've been dealt.
So does preserving Fed independence eventually require it to raise rates even when doing so makes Washington's interest bill materially worse? Is willingness to kind of impose that cost the real test against fiscal dominance?
