Federal Reserve Alert! James Bullard: "Financial stress can be harrowing, but also tends to reduce the level of interest rates"
“Continued appropriate macroprudential policy can contain financial stress, while appropriate monetary policy can continue to put downward pressure on inflation”
St. Louis Federal Reserve President James Bullard Presentation: "Financial Stress and the Economy," Arkansas Bankers Association’s 133rd Annual Convention, Day with the Commissioner, Little Rock, Ark.
Highlights:
- Bullard said that while financial stress has been on the rise in recent weeks, the macroprudential policy response has been “swift and appropriate.”
- The data on the real economy have generally been stronger than expected during the first quarter of 2023, and inflation remains too high, he said.
- Front-loaded Fed policy has helped keep market-based measures of inflation expectations relatively low, which is aiding disinflationary prospects during 2023, he said.*
- “Continued appropriate macroprudential policy can contain financial stress, while appropriate monetary policy can continue to put downward pressure on inflation,”
Financial Stress Returns:
![r/Superstonk - Federal Reserve Alert! James Bullard: "Financial stress can be harrowing, but also tends to reduce the level of interest rates" “Continued appropriate macroprudential policy can contain financial stress, while appropriate monetary policy can continue to put downward pressure on …](https://preview.redd.it/l3x8bmx21asa1.png?width=1002&format=png&auto=webp&s=a919075182d69297eb5e0274d5f44de716071ffc)
- Bullard discussed recent developments that have led to volatile trading in banking equities and increases in measures of financial stress.
These include:
- The closing of two U.S. banks with crypto-related strategies (Signature Bank and Silvergate Capital Corp.)
- The rapid run on deposits at Silicon Valley Bank and its closure by the FDIC,
- The sale of Credit Suisse to UBS with Swiss government assistance.
- “Closely related measures suggest that financial conditions have become tighter,”
- “However, financial stress and financial conditions metrics as of today remain low compared with levels observed during the Global Financial Crisis (GFC) of 2007-2009 or during the onset of the pandemic in March-April 2020.”
- He described the macroprudential response as "strong" and said that regulatory authorities stand ready to take additional action as necessary.
Regarding interest rates, Bullard said the Fed has been raising the policy rate over the last year to combat the highest inflation in the U.S. since the early 1980s.
- “Even with considerable forward guidance, it is relatively common that not all financial entities adjust their businesses appropriately to the changing environment,”
GDP Growth and Labor Market Performance:
![r/Superstonk - Federal Reserve Alert! James Bullard: "Financial stress can be harrowing, but also tends to reduce the level of interest rates" “Continued appropriate macroprudential policy can contain financial stress, while appropriate monetary policy can continue to put downward pressure on …](https://preview.redd.it/zjf67rwr1asa1.png?width=1010&format=png&auto=webp&s=c04d73bc3c504519f45d402f836945e5d5440d17)
![r/Superstonk - Federal Reserve Alert! James Bullard: "Financial stress can be harrowing, but also tends to reduce the level of interest rates" “Continued appropriate macroprudential policy can contain financial stress, while appropriate monetary policy can continue to put downward pressure on …](https://preview.redd.it/5pbydefs1asa1.png?width=987&format=png&auto=webp&s=000ae6d5c0648b4b6655bb204d9b0a2c73c1b255)
![r/Superstonk - Federal Reserve Alert! James Bullard: "Financial stress can be harrowing, but also tends to reduce the level of interest rates" “Continued appropriate macroprudential policy can contain financial stress, while appropriate monetary policy can continue to put downward pressure on …](https://preview.redd.it/eezsaiws1asa1.png?width=1016&format=png&auto=webp&s=4b1617a0685049683b16853ec740fe1fa2afab58)
![r/Superstonk - Federal Reserve Alert! James Bullard: "Financial stress can be harrowing, but also tends to reduce the level of interest rates" “Continued appropriate macroprudential policy can contain financial stress, while appropriate monetary policy can continue to put downward pressure on …](https://preview.redd.it/uuq245bt1asa1.png?width=973&format=png&auto=webp&s=acb359b9d22f18a6dedf9a1c9088837c2bc6947e)
- Incoming U.S. economic data during the first quarter of 2023 have generally been stronger than expected, Bullard said.
- GDP growth improved in the second half of 2022 and the Atlanta Fed’s GDPNow nowcast of first-quarter 2023 growth was 1.7% as of April 3.
- The associated real consumption expenditures also have been stronger than expected.
- Bullard also said labor market performance remains strong: “Normally, a strong labor market bodes well for consumption expenditures, the largest component of GDP,”.
Disinflation and Inflation Expectations:
![r/Superstonk - Federal Reserve Alert! James Bullard: "Financial stress can be harrowing, but also tends to reduce the level of interest rates" “Continued appropriate macroprudential policy can contain financial stress, while appropriate monetary policy can continue to put downward pressure on …](https://preview.redd.it/9587pdxy1asa1.png?width=998&format=png&auto=webp&s=a329eb0cd8539b6a34cbfe5cd988f855f3ee0f9a)
![r/Superstonk - Federal Reserve Alert! James Bullard: "Financial stress can be harrowing, but also tends to reduce the level of interest rates" “Continued appropriate macroprudential policy can contain financial stress, while appropriate monetary policy can continue to put downward pressure on …](https://preview.redd.it/k9s816bd1asa1.png?width=1048&format=png&auto=webp&s=ad6b8ebdc095ed3bbfbe314ba285ba294a597808)
- Inflation remains too high, Bullard said, but claims it has declined recently.
- The Federal Open Market Committee has a 2% inflation target specified in terms of headline personal consumption expenditures (PCE) inflation.
- Headline inflation has declined, but it can be inordinately influenced by fluctuations in volatile prices, he said.
- Measures of inflation that strip out volatile price movements, such as core PCE inflation (which excludes food and energy prices) and the Dallas Fed’s trimmed mean inflation measure, also have declined but by less than the headline measure, he said.
- Bullard also talked about market-based measures of inflation expectations, which he said are now relatively low in part due to front-loaded Fed policy during 2022.
- According to standard macroeconomic theories, inflation expectations are a key determinant of actual inflation, he explained: “This bodes well for the disinflationary process in 2023,”...
Financial Stress and Macroeconomics:
![r/Superstonk - Federal Reserve Alert! James Bullard: "Financial stress can be harrowing, but also tends to reduce the level of interest rates" “Continued appropriate macroprudential policy can contain financial stress, while appropriate monetary policy can continue to put downward pressure on …](https://preview.redd.it/kh17gtk42asa1.png?width=1063&format=png&auto=webp&s=4de3b0d1b66197609addb565632395527e93ef57)
- In the last four weeks, the benchmark U.S. 10-year Treasury yield has declined by about 50 basis points, and the two-year Treasury yield has declined by about 100 basis points, Bullard noted.
- “This may help to mitigate some of the negative macroeconomic fallout that might otherwise occur in the aftermath of a period of financial stress,” Bullard explained.
TLDRS:
- The data on the real economy have generally been stronger than expected during the first quarter of 2023, and inflation remains too high.
- Incoming U.S. economic data during the first quarter of 2023 have generally been stronger than expected, Bullard said.
- In the last four weeks, the benchmark U.S. 10-year Treasury yield has declined by about 50 basis points, and the two-year Treasury yield has declined by about 100 basis points, Bullard noted.
- “This may help to mitigate some of the negative macroeconomic fallout that might otherwise occur in the aftermath of a period of financial stress,” Bullard explained.
![r/Superstonk - Federal Reserve Alert! James Bullard: "Financial stress can be harrowing, but also tends to reduce the level of interest rates" “Continued appropriate macroprudential policy can contain financial stress, while appropriate monetary policy can continue to put downward pressure on …](https://preview.redd.it/xbtytdrt0asa1.png?width=610&format=png&auto=webp&s=817421f0d8ec4d792dee614b2b338a5117553cf6)