More Economists Cite Concerns Over Deflation
MICHELE NORRIS, host:
James Bullard thinks of himself as an inflation hawk, alert to signs that prices might be rising too quickly. Of late, though, he's become a deflation hawk, loudly warning that prices might soon begin to drop.
What Mr. Bullard thinks matters. He's the president of the Federal Reserve Bank of St. Louis, and a member of the committee that sets policies that determine interest rates. He joins us now; welcome to the program.
Dr. JAMES BULLARD (President, Federal Reserve Bank of St. Louis): Thanks for having me.
NORRIS: Why are you so worried?
Dr. BULLARD: I think it's an issue for monetary policy. Youve got the specter of Japan; over the last 15 years or so, theyve been at zero nominal interest rates and sort of mild rates of deflation over that - most of that period or the entire period. And if we drift into that kind of outcome, I think it'll be very hard to get out.
NORRIS: Now, you well know that some look at the position that you're taking and saying that it's not necessarily warranted, that you might be acting a little bit like an economic Chicken Little. There are some who argue that moderate deflation is something that you naturally see in a productive economy.
Dr. BULLARD: Well, for those that think deflation is the better outcome, then, you know, you should just say, you know, bring it on - Ill go to the deflationary outcome. So those people have a tough case to make. I think most outsider observers, and those inside Japan, have argued that the Japanese situation is not a good one.
So I think the burden is on those who say deflation is fine, and we shouldn't worry about it. The burden is on them to make the case.
NORRIS: The president of the Federal Reserve Bank of Philadelphia, Charles Plosser, is not convinced that we should be worried about deflation. For example, he says that deflation is not a problem, that it's hard to imagine how you can get that when you have got a trillion dollars in excess reserve sitting in the banking system, or as long as expectations of inflation are well-anchored.
Dr. BULLARD: He makes some great points there. Inflation expectations are a critical component of this. And I would go by the market measures - the so-called TIPS-based measures. If they are all around 2 percent, or higher than 2 percent, then I wouldnt be as worried. But recently, the five-year TIPS-based measure - of expected inflation - has fallen quite a bit from where it was earlier in the year, to about 1.4 percent.
So right now, thats not quite low enough to really get worried. But if it starts to go - say, below 1 percent or lower, then you might be sliding toward this deflationary outcome.
One of the reasons Im putting out a warning now is, I think we need to take action before we really get into the grips of a deflationary trap. So you really dont want to get in that situation. It's very hard to get out of, as the Japanese have learned over the last decade and a half.
NORRIS: If we look to Japan, a country that has had recent experience with deflation, what can that country teach America?
Dr. BULLARD: I think - the main lesson I take is that they have tried many things to get out of this trap and out of this situation of slowly declining prices, and nothing has really worked for them. And so it's been a vexing problem for the Japanese. If you talk to the specialists there, theyll say that they went through all the debates that we're going through - over the last decade or more.
NORRIS: Seems like there's a psychological aspect to deflation: The more you talk about it, the more you might make it happen. And we're talking about it right now.
(Soundbite of laughter)
NORRIS: And you talk about it a whole lot. So...
(Soundbite of laughter)
Dr. BULLARD: Well, there are self-fulfilling aspects to macro-economics. And one of the things in my paper I talk about is exactly this, that there's two possible outcomes. And both of those outcomes are consistent with the policies that we're following right now. So I very much advocate accepting the fact that there's two possible outcomes, and then designing policy from that point of view, rather than sort of being in denial about the Japanese possibility for the U.S.
NORRIS: James Bullard is the president of Federal Reserve Bank of St. Louis. Thank you so much for being with us.
Dr. BULLARD: Thanks so much for having me. I really appreciate it.