By Ben Leubsdorf And Jon Hilsenrath
James Bullard, president of the Federal Reserve Bank of St. Louis, told The Wall Street Journal that recent financial-market volatility hasn't had a significant impact on the U.S. economic outlook, keeping the Fed on track to raise short-term interest rates.
Below are excerpts from the interview, which was conducted Friday morning on the sidelines of the Federal Reserve Bank of Kansas City's annual economic symposium in Jackson Hole, Wyo. Mr. Bullard spoke off-camera, then answered additional questions for a video. The transcript has been edited for clarity and length.
WSJ: So tell us what you're thinking about September.
MR. BULLARD: Markets have been volatile in the last 10 days. And I think the key question for the [rate-setting Federal Open Market] Committee is, how is this volatility impacting the outlook for the U.S. economy over the next six months and then over the next two years? And my basic answer is, I don't think there is that much of an impact on the outlook for the U.S. economy. We have very good fundamentals. We have good labor-market data. We've just received some pretty good growth data. And there are factors that go in both directions for the outlook for the U.S. economy. So you might think that this volatility is a positive thing for the U.S. because longer-term interest rates are lower than they would otherwise be, oil prices are lower which is good for U.S. consumers. On the other hand, the dollar's stronger and global growth might be a little bit slower. So if you took those four factors, depending on how much you wanted to weight each of those factors, they might essentially wash out, which would leave the U.S. outlook about the same, and therefore leave the U.S. monetary policy strategy about the same.
WSJ: Although the factors influencing the outlook shift: You've got factors moving toward a stronger dollar and a weaker global outlook, and lower rates and a stronger domestic outlook. Does that change the monetary policy setting that you want--stronger dollar, lower long-term rates?
MR. BULLARD: Lower long-term rates in the U.S. should be a bullish factor for the U.S. Stronger dollar is, you know, a negative factor, but depending on how much you want to weigh that--usually, lower interest rates are usually more powerful than movements in the dollar. Movements in the dollar have to be sustained over a very long period of time.
WSJ: A few months ago, you said, "I'd like to go, but I want to have the wind at my back, I want good data," and that was a moment when we had pretty weak data coming in. When you're looking at the universe of data, how much does this market stuff factor versus the GDP data, the spending data that we're getting?
MR. BULLARD: Yeah, I think the fundamental data that we've received has been relatively good, especially labor markets: lots and lots of good jobs data over the last two years, and it seems to be poised to continue. I think unemployment will continue to fall through the remainder of the year here. We have initial claims for unemployment insurance at this really low level. If you adjust that for labor force, it's probably as low as it's been in the postwar era, or at least for a very long time, and I don't see any reason why that's not going to continue. So I think we're...going to get above-trend growth and continued improvement in labor markets regardless of the global volatility.
WSJ: You said a couple weeks ago that you expected to be arguing for a rate increase in the September meeting. Is that still your expectation?
MR. BULLARD: Well, I'm willing to respect the volatility in markets and see how it shakes out here. But just sitting here today, I'm not seeing how this is going to change the forecast and therefore I think the contours of monetary policy are about the same today as they were a couple weeks ago. But I'm open to looking at data, and we don't have to make a decision until we get to the meeting, so why not wait until the meeting and see if things settle down here globally?
WSJ: Right. But given the forecast that you had, has it been your inclination to get started?
MR. BULLARD: Yeah, I think the Committee has a strategy and I have a strategy of: go early, because that will give us flexibility to be more gradual as we're trying to normalize interest rates. And Chair [Janet] Yellen has talked about this as a strategy, and I think it would serve the Committee well to stick to that and follow that. So what that means is that, yes, we can get started with liftoff, but we would retain the option of pausing or going very slowly if the data coming in were weaker than we expected.
WSJ: Is that an agreed-upon strategy? I mean, the chair has talked about it.
MR. BULLARD: The chair has talked about it. I think [Federal Reserve Bank of San Francisco President] John Williams has talked about it in public comments. I'm certainly on board with that. You'd have to ask other members exactly what they think about that. But the alternative, which is to wait and wait and wait and then, all of a sudden, make a lot of moves in a short period of time, I think sounds risky to me, and sounds like the kind of thing that could turn into a policy mistake and possibly damage the U.S. economy if we got to that situation. So by going sooner, we're going to provide a lot more flexibility to the [Fed's policy] Committee to go at a deliberate pace in normalizing policy.
WSJ: So how do you think the Committee should go about articulating this strategy in the policy statement and elsewhere--what you just articulated, the idea of going early, reserving the right to pause, et cetera? How does the statement need to change in order to articulate that that's the plan?
MR. BULLARD: Well, we'll do our best to come up with language on that, but we can also reinforce that through testimony and speeches, and some of that has already occurred. But I think you'll see more of that as we go forward.
WSJ: Can we talk about your longer-run rate outlook, looking out to '16, '17 and the long-run neutral fed-funds rate? How are your forecasts on that front changing right now, if at all?
MR. BULLARD: I've still got the terminal level of the funds rate at 3.75%. I did mark that down over the last two years or so, but I'm pretty happy with where it is, so I think we're OK on that for now, and so I haven't changed that kind of stuff. I've tended to be more optimistic on the economy than some, and so that's got me with probably a somewhat faster and steeper path than others have. But I'm perfectly willing to react to the data as it comes in and adjust that as we try to go through this process over the next two years.
WSJ: The market is saying that it sees a much more gradual path than is forecast by the Fed.
MR. BULLARD: Yes.
WSJ: Does that give you any pause or give you any inclination to mark down your own forecast for the fed-funds rate for '16 and '17?
MR. BULLARD: We've talked about it before, and I've been very concerned that the market expectations for the funds rate path is different from the Committee's expectations and I would interpret some of the volatility in the last 10 days as being due to that clash between what markets are thinking and expecting and what the Committee's thinking and expecting, and I've been saying that that's got to get resolved at some point and it will probably be volatile. And that, I think, is part of what's happening here.
But I just think that the markets are unrealistically low, given where the economy is in the cycle and the likelihood of continued improvement in the U.S. economy over the next two years. Probably unemployment will come down in the 4% range and probably into the low 4% range over the next two years, and we've got to map out a strategy that's going to have the right path of interest rates for that kind of environment.
WSJ: Where do you think the long-run unemployment rate is right now? What's your forecast?
MR. BULLARD: We've got one of the highest ones, because we're not big believers in the natural rate of unemployment. But even where we are now with the unemployment rate, it's about equal to...the central tendency the Committee has said is the natural rate of unemployment.
Write to Ben Leubsdorf at email@example.com and Jon Hilsenrath at firstname.lastname@example.org