An Evening with Dean James Bullard: The Federal Reserve

Absolutely.

Well, I'm a PhD in economics from a school that cannot be named. Not at the moment. No, I went to IU Bloomington and had a great experience there. And then I took the job in the Fed right from graduate school. And so I've been at the Fed or was at the Fed for a long time. Was on the research staff there. That job is very close to an academic style job. You write research papers, you get citations, you go to conferences, you have co-authors. That's the world that you live in. I also taught at Washington University in their PhD sequence there and then I was named president in 2008. And so I was more in the policy world from 2008 to 2023 and then I took the offer to come to Purdue and run the re-imagined Mitch Daniels School of Business.

Yeah. I always joke that I learned all the Fed stuff while I was on the research staff and as vice presidents and stuff, but then when I became president, all of that was out the door and you had to learn everything all over again. Yeah.

Yeah. What I love about that ranking was Paul Krugman was down the list a little bit. So.

You're number five.

Well, one of the main things is I was appointed relatively young compared to other people that get appointed to the Federal Reserve. So, I think that was one of the key features. So, I could serve for a long time as president. But a lot of people would get that position later in your sort of work life cycle and then they would retire in the job or whatever. So my situation was a little different from that perspective.

That's it. It was kind of I was see I knew it. Mitch I had a call with Mitch. I was actually working out of Minneapolis that day out of Minneapolis Fed. And I remember it was scheduled for 30 minutes. We talked for what two hours. So that was pretty much the start of it.

Oh, it was so many things. But for me it gets me closer to the academic world which I love, the research world which I love. So I think that's a big factor. They wanted to obviously they're naming the school after Mitch who has great hordes of admirers I would say and it's just fantastic and that you know it's something where you're trying to manage and go from good to great and I love that plenty of money behind it and so resources were going to be there so all of that has worked out very well and you know, makes sense strategically for Purdue and for Indiana as a state. And so all of that sort of fit together as far as I was concerned.

Well, you have to be humble and when I came into the job, I think, you know, we all think we know things, but I had to learn a lot. And I learned a lot, especially from my first vice president, but others as well that were on the management team that had a lot of experience. And so I think that helped me enormously as I was getting into the job. And it was a you know, you walking into a crisis basically immediately upon taking the job. So there's a lot to like about how we were able to build up the management team further and handle the crisis.

Yes. So the Federal Reserve is the central bank of the United States. And it has been around for more than 100 years now. But you might wonder why it has the structure that it has. There's a saying maybe a book about the creature from Jekyll Island that's a reference to the actual origins of the Fed. But the reason it was done there at Jekyll Island on a secretive mission was because the first two central banks of the United States failed. And in particular the second bank of the United States was a major political issue in the time of Andrew Jackson and he campaigned he was a populist figure not unlike what we have today. And thought that the bank represented eastern interests and was ripping off people in the middle of the country like here and it had a successful campaign to allow that charter to expire. And so the US did not have a central bank from that point pre-Civil War through the Civil War and all the way up to the panic of 1907. So you know that period was roiled by financial crisis of various kinds. And by the time you got to the panic of 1907 people decided you know the country had grown a lot GDP was much higher and becoming an industrial world power and you didn't have a central bank and that was kind of considered it made the US suspect I think in the eyes of European money especially but also from elsewhere in the world and so something had to be done. Everyone kind of threw in the towel at the panic of 1907 and said, 'Well, we were going to have to do something.' And so they arranged this trip to Jekyll Island supposedly as a hunting trip. But Paul Warburg was there, a famous international banker and one of the major political figures of the day, the senator from Connecticut, if I have it right. And they kind of hatched up a plan about how they would put together a central bank for the United States. But the key things are and that turned into the Federal Reserve Act, which is what we're still talking about today and which still governs the central bank today. The key features were that you were going to decentralize power out across the country. You weren't just going to let everything be centralized in New York City or in Washington DC. So the plan and the actual implementation has three parts to it. There's a Washington DC part which is sort of the political arm. There you have seven governors of the system. They are appointed by the president and confirmed by the senate. But the system also set up 12 banks across the country. One of which is in New York. So you have the financial and the New York Fed is very powerful and they are the connection to Wall Street and to global financial markets. But you also have a main street component which is the other 11 banks which are all out across the country. And I might also mention that all the banks have branches as well. So there's even more outreach maybe than you might think. The St. Louis Fed for instance has branches in Little Rock, Memphis and Louisville, Kentucky. So quite the reach really across the country. So that system I always say works it's a brilliant design actually and it works best when all three legs of the stool work well. You have the main street component talking about input from places like Indiana. You've got the Wall Street component interfacing with global financial markets and you've got a political component that's interfacing with the Congress and with the administration. So if all of the three of those play their role effectively, then I think you get pretty good monetary policy for the United States.

Before the ink was dry on Woodrow Wilson's signature. They were already squabbling about that and you know they had that the act called for it had an implementation clause in it. I guess you can still read it and it said here's how we're going to do it. We're going to have a commission. And the commission's going to decide where to put these reserve banks. You can have up to 8 to 12. And the commission took applications from all over the country. I don't know if Indianapolis put one in or not, but probably they did. And when the commission was looking at this issue, of course, all the population is really over on the East Coast compared to today. So, California wasn't California at the time. And so they put just the one bank out there, the San Francisco Fed, and now they have, you know, California all by itself is the fifth largest economy in the world or something like that. So I think, you probably wouldn't do it that way again. And Missouri famously got two banks. St. Louis was considered a foregone conclusion. St. Louis was the fourth largest city in the nation at the time and kind of the big western city because the other three large cities were on the east coast, Philadelphia, Boston and New York. And so it was considered obvious that St. Louis would get so this is what the commission came up with but again you do have all these branches so it's not like the other places don't you know are completely devoid of representation. You've got a branch in Miami, you've got a branch in Detroit, we've got a branch in Helena, Montana, you've got a branch in Seattle. So, I've been to most of them. And they are a good way to get input from all over the country.

No, one way you it's like the Dodgers move to LA. So you can move the New York Fed to LA and that would all be balanced together.

Yeah the mandate was really decided upon in the 70s and it is a triple mandate. It's often described as a dual mandate. You're supposed to have stable prices, maximum employment. The third part is the moderate long-term interest rates. And so when interest rates were down at zero from 2010 to 2019, I would always say, hey, we're nailing that third mandate. Now we're back in the world of positive nominal interest rates. So that's all gone. Well our main rival in the world which is the European Central Bank actually just has a price stability mandate and nothing else by treaty. So that's probably not going to change anytime soon. What I think about this is that the practice of monetary policy, the way it's conducted and the way you look at the data and the way you make decisions, I don't think that that really depends on what it says about mandates because the only thing the central bank can do in the medium term is control the inflation rate. It can't really control the real economy or employment or any other real variable. So I think the Europeans in many ways have it right. They say well okay over the medium-term five years or something the only thing that the central bank is supposed to do is keep inflation low and stable. A lot of that came from the Germans. The Germans are very have a lot of rectitude on this issue. And they're very influential in European politics. So on the American side, you've got this dual mandate, but it should remind everybody periodically that, you know, the Fed can't make the economy grow rapidly. They can't all of a sudden make everybody rich or anything like that. But what they can do is control the inflation rate over a medium-term like five years.

On a rotating basis, but that's for voting for actual meetings. Everybody's there. So, and you know, I mean, look at how intricate the Federal Reserve Act was. They're thinking very carefully about, you know, who's going to get to vote and okay, there's going to be seven governors, then there'll be five presidents. So, if it really came down to something, the president appointed people would have seven votes. So, they would have it just enough to carry the day if they're at full strength. Sometimes they weren't at full strength when I was there. So, they were down to three governors at one point, but they thought very carefully about all these issues. Also the boards. So the banks are supposed to be like private corporations and they have boards of directors. So I had a board. It was made up of basically movers and shakers from around the eighth Federal Reserve District and they were great and gave me a lot of guidance and input as a CEO of the bank. But even that was considered very carefully in the act. Three of these board members would be bankers or represent the banking industry. Three of the board members could not be bankers and had to represent the industry or business part of the economy and three of them were supposed to be sort of impartial observers appointed by the board of governors in Washington DC. So super intricate about exactly how all this is going to work. Why did they decide on that? The bankers are sort of the supply of credit. The business people are sort of the demanders of credit and the politically appointed people supposedly are the impartial observers that are deciding between the borrowers and the lenders. So I think kind of like a checks and balances. Absolutely. And I think you know what they had this eye toward the idea that the previous two central banks of the United States had failed. How were they going to design something that would stand the test of time even when there were crises. They had the great depression had big inflation in the 70s. You have had the pandemic. You had the global financial crisis. You know, the Fed's able to weather all that because of the attention to the design of the act all these years ago. So, lots of vision. I would say I give a lot of credit to that generation.

This big 19 member group comes together eight times a year in Washington, but everyone's there every meeting. Everyone speaks at every meeting. You wouldn't be able to tell who's voting. In fact, when I was there, I would forget who's going to be voting on that particular meeting.

Yeah. Well in a room you come out with 20 opinions.

It's a big meeting. It's a formal meeting. There's heavy pressure on pretty much every meeting. So, you have to have your ducks in a row. And that's the job of the chair is basically to formulate policy not just for the current meeting, but the path of policy and the meetings ahead and get people more or less in line with what's going to happen. And you know, believe me, everybody does have an opinion. And they take their role very seriously and they should but they and the banks have their own staff you know so you have your own team to analyze everything and the board staff is also very large so and very good so lots and lots of opinions. It's a long meeting at least you know in recent years it's been a day and a half meeting and there's been more and more awareness all the way through my career that you're not really just deciding what's going to happen on that day. You're deciding how to shape the future path of policy over the next let's say 6 months to a year and that's really what influences markets maybe even more than what happens on the particular day. So when you vote for things then you vote on you know is it a good decision that day and what you do that day but a lot of the discussion is really about what's the path of policy going forward and a lot of the kind of jockeying around on the committee is well okay I can go for a rate cut today but I don't think we should do anything next time or the time after that and somebody else might feel like I think we should do even more today or I think we should do what we're going to do today and we should do even more next time. So that's most of where the debate is and the jockeying.

It's too late. Okay.

So this is what I'm saying. You can't run a meeting of that size with that kind of pressure on the meeting without basically knowing here's where we're going to do. Maybe not exactly. I would say Chair Bernanke was one that left things open a little bit and he liked to do that because the committee could take ownership at the meeting and they could talk about this provision or that provision, but still it's pretty much baked out. Janet didn't like to do that by the way. Janet didn't like messing around with the language, you know, right at the end and stuff like that. She wants everything cut and dry. So people have a little bit different styles, but.

Powell also didn't really want to monkey around at the end. But when the committee gets in trouble is, you know, you've kind of orchestrated the chair's kind of orchestrated here's basically where we are. Here's what's going to happen at this meeting. Here's the language we're going to use, you know, 90% or something like that. But then in the days right before the meeting, if you get a lot of market volatility, that usually scrambles all the calculations and then that makes the meeting far more hectic and more difficult and it can go awry. And so that did happen a couple times more than a couple times probably when I was on the committee. And so the committee also meets out of sequence. So you don't have to meet just the eight times a year. You can meet other times. One time recently when that happened was the pandemic when you know we had a meeting scheduled for Tuesday and Wednesday. But things were happening so quickly that we actually met on the Sunday all day Sunday and did everything on Sunday and announced before markets open on Sunday at 6 Asian markets open at Sunday at 6 and we wanted to be done before that. So it shows you how market events and world events can really scramble the calculus about actually how to run the meeting.

Yeah. So this comes out of the you know statistical side of the economics literature which called the econometrics literature. And there was some great work done in the 90s which I picked up on about regimes in statistics. So what they're really talking about is you've got some variable and it has a mean and it has some variance and it bounces around like this around the mean. But in nonlinear econometrics or this regime econometrics, it would bounce around this mean for a while, then it would switch up to this higher mean and bounce around up there for a while and then it would switch back to the lower level or maybe to some other level that you hadn't seen in the past. So this started to be called regime switching. And it works great for certain types of problems in economics. One that I often focus on is productivity growth because productivity growth in the 1960s in the US was very rapid and so you were bouncing around a high mean and then after 1973 productivity started growing at a slower pace. All these papers were written about the productivity slowdown blah blah blah and so you were bouncing around a lower mean productivity growth rate all the way through the 1980s all the way into the 1990s. So the regime is the fact that it goes on for such a long time. It's not just the normal statistical bouncing around that you would otherwise see. And then in the 90s miracle happened and Greenspan was on top of it and he predicted he was very good on this you bounced back up to the fast productivity growth and stayed there for about 10 years in the US. So that's why the second half of the 1990s is considered a good analogy for what's happening today. If you have fast productivity growth, that's basically your most important variable, means that real income for all of us is going up faster than it otherwise would. You're getting a lot of growth in GDP without inflation. That's what happened in the last half of the 1990s. And by the end of the 90s, lots of problems have been solved. Lots of wealth have been created. Unemployment went down to 3.8%, a previously unheard of low. So it matters a lot whether you're in the high productivity growth regime or whether you're in the low one. After 2005, we switched back to statistically speaking to this low growth regime. But now I'm hopeful that we're switching again partly because of artificial intelligence and all the investment around that to a high productivity growth regime and we'll get the faster GDP growth again that we had in the second half of the 90s and into the later period. So hopefully we'll get that.