In an October 9, 2014 speech James Bullard of the St. Louis Fed, a voting member of the FOMC said this:
When there is a mismatch between what the central bank is thinking and the market is thinking, that sometimes doesn’t end well, because there can be a surprise later on,” Mr. Bullard told reporters.
Right now, “the markets are making a mistake” and expect the Fed to maintain its ultra-easy policy stance longer than Fed officials themselves currently expect, Mr. Bullard said. When it comes to these expectations, “I would prefer that those be better aligned than they are.
That day the DOW opened at 16,994 and closed at 16,659, down 335. The day after the DOW closed down another 115 points, the day after 224 points down, and another 180 points lower over the next two days for a grand total of 844 points over 5 days.
Five-year Inflation expectations had been declining from the much below target norm since last month, already 38% lower than target. And of course Bullard just couldn’t wait to see what consumer spending for the month of September looked like before making the speech.
But I’d like to think about what he’s saying here. He says there’s a mismatch between what the market is thinking and what the central bank is thinking. That seems a bit presumptuous. Perhaps he would like to formulate monetary policy out of context of the conditions of global economy, and out of context of the dual mandates, and even out of context of the stated goal of 2% PCE inflation over the longer term. But is he really speaking for the FOMC on the whole?
Generally, I’d say Bullard got schooled in what happens when there is a mismatch in thinking with the mind of a rogue central banker stuck in the 1970’s instead of the here and now, and he was forced to recant on October 14th by saying that QE3 should be extended – which halted the precipitous drop.
The episode of market crashing in its entirety was needless and senseless, caused by a rather moronic regional president without any justification whatsoever.
If a private person or party had caused the same magnitude of global market turmoil with unjustified false rumors, that person or party would be neck deep in legal troubles by now, and rightly so. And I am rather astounded that Bullard is allowed to do so in a rogue fashion with impunity, given the quasi-private status of the regional branches.
I had mentioned a few posts ago about the proposal to strip the FOMC voting rights of Fed presidents that Barney Frank floated shortly before he left the House of Representatives. I support it, and think it should be taken up again and seriously considered so that we can take these loose cannons like Bullard and toss them overboard before we all end up with nothing left.
In the meantime, Bullard shouldn’t wait until the government makes him irrelevant and just tender his resignation immediately.