[indistinct conversations] ladies and gentlemen, welcome to the press club and welcome to the National Economists club 2019 summer signature event. I am cliff waldman, this years president of the National Economist club. I am happy to say that we are , our weeklyter year Lunch Program is enjoying great attendance, we have a rich diversity of speakers that reflect the wonderful intellectual diversity in our field. Today, we come to one of our two major events of the year, our Summer Signature Program and i need to think two friends, to bank sponsors who have made todays rate event worthwhile. Inforof all my friends in um. A researching and Consulting Firm that has been open for 52 years and embodies the great tradition of innovative Economic Research at the university of maryland. Secondly, our friends at the National Association of realtors. Since 1908, they have been the voice of the Real Estate Community in washington and provided some invaluable economic data, Economic Research and in that critical sector of the economy. With that in mind, with those support organizations supporting us and this large and distinguished audience behind us, we have come to a moment. I have to tell you, i cannot imagine a better marriage of a moment and a speaker than what we have today. Is a man who embodies the best of our field. One of the joys of doing this and it is a hassle putting together an event like this, one of the joys of doing this is not just to introduce the speaker but to think about what makes a person unique. Theory,used economic highlevel economic theory to powerfully propel the thinking of the Federal Reserve forward in a way that will then if it all americans, that is benefiting allamericans. At the same time he is very much and tech grow and a man of the people who are affected by his policies. He is of course the president and ceo of the st. Louis Federal Reserve. He also oversees the Federal Reserves a district including activities at st. Louis headquarters and branches in little rock, arkansas, louisville, kentucky, and memphis, set memphis, tennessee. He is a noted economist and scholar. Every time he publishes a paper, i think the thinking on the fomc moves forward. Early in his tenure, the lord talked about the possibility of deflation in ae paper. He argued strongly for something that may seem like common sense but i have not heard before. We buyliberations should the data, by the need. During the financial crisis he advocated for inflation targeting, something that may have saved a lot of us. He is an active member in his community. He sits on the board of trustees of the united way, the board of directors of the st. Louis regional chamber, and the board concurrence of the academy and leadership and a list of other things we dont have time to get into. He is a native of lake forest, minnesota and received his doctorate in economics at the university of indiana at bloomington and holds a bachelor of science degree in quantitative message methods and Information Systems from st. Cloud university. Let me tell you how our program is going to work today. President bullard will speak. After that my colleague will do an interview with him. Ed is a noted economic correspondent, a longtime Federal Reserve expert, and a past president of the National Economy economists club. We will spend some time taking audience questions. We ask respectfully because president bullards time is limited that you keep your questions concise and we will do our best to address them respectfully. Bullard, wesident are grateful for your time. Waitingery aware of the us of the moment and we look forward to your insights. Ladies and gentlemen, jim bullard. [applause] gosh, what a great introduction. I think i will just a down because it can only be downhill from here. I do appreciate the opportunity to be here at the National Press club and in front of the nec and i amg forward to looking forward to hearing your comments on current Monetary Policy or whatever you want to talk about about the u. S. Economy. I called this a sea change in u. S. Monetary policy so hopefully, i can convince you of the dramatic changes that have withdy occurred in 2019 respect to u. S. Monetary policy above and far beyond the rate cut that we had just last week. If you dont want to listen to the whole talk you can read the slides. We made significant changes in Monetary Policy which many of you are aware, beginning in january of this year. Those changes were made in anticipation of Slower Growth in the u. S. Economy during 2019, which is materializing. I will talk about that during the talk here. But also in anticipation of heightened uncertainty with respect to trade policy, so i think we anticipated the idea that trade policy was going to be volatile, currently, and Going Forward across the forecast horizon. I think we could do more at this point, but we have already done a lot so what i would like to do is take some stock of what we have already done and see how that impacts the economy and then make decisions Going Forward. That is my main point here. The third bullet point. We will talk about that in detail. May be too much detail as i go through this talk. Placementntime, pressures are muted in the u. S. Economy. I will talk about that. We have yield curve issues that i think are still with us. Were looking for those two get better let me just talk about this argument about a seachange in u. S. Monetary policy and review what has happened since late 2018 when the story begins. In 2018, the Interest Rate environment was much different than it is now. That is my point, i guess, to the extent of what i have, and i do have one. I want you to focus on just the two year yield, two year treasury yield, because the two year treasury yield embodies both the current level of the policy rate, but also the immediate outlook for the policy rate. If you look at the two year yield as of november, early november last year, it was almost 3 . November last year, it was almost 3 . The the 10 year treasury was trading to yield about 3. 25 . It was a different Interest Rate environment. The 3 on the twoyear reflected the fact that the policy rate had been increasing through 2017 and 2018, and that the committee was projecting further increases in 2019 and 2020. Spread between the two year and 10 year. That was the situation at the beginning of the story. We raised the policy rate at the december meeting and projected further increases in 2019. Then the story began to change with chair powells comments at the American EconomicAssociation Meetings in atlanta on january 4. Gradually, through the First Six Months of 2019, the committee started to project less and less in the way of policy rate increases. We also put together a plan to cease the runoff of the balance sheet, which is fully being implemented as of our last meetings decision. We did not change the policy rate at the june 19 meeting, but we strongly suggested that we would that a rate reduction was forthcoming. At the meeting, that we had last week, we went ahead and followed through on that rate reduction. So, the main point here is that the whole Interest Rate structure is dramatically lower, given the seachange. If you look at the twoyear treasury, it was trading to yield at about 1. 25 percent. That would be a decline of almost 125 basis points from the early november reading. Im pushing back against people, maybe some of you, who said oh, the 25 basis points, that is not enough in this environment, and boy, that is a small chain and that will not move anything. No, that is not the way to read this. There has been a seachange in Monetary Policy. A very large movement which i would characterize by this change in the twoyear, because not only is the level of the policy rate changed, the outlook for the policy rate has changed and that is what the twoyear is telling you. It is combining those two things together. 125 basis points lower. Things are moving quickly here. Even today, the twoyear, 10 year spread is still positive. Thats because markets are probably expected more action from the committee. The point is that the structure of shortterm rates dropped by about 125 basis points due to fomc action. The longerterm rates fell in tandem. Most of the time when we are describing this to clients and customers, we would say that is more important for investment decisions, but this is a case where the longerterm rate came down in tandem with a short rate. Here we are providing more Monetary Policy accommodation than we did late last year. Bottom line, u. S. Monetary policy, quite a bit more accommodative than it was. Furthermore, lets channel our inner Milton Friedman here. There are long and variable lags in the effective Monetary Policy on the economy. These are developments that just happened over the last six months or so. You would not expect them to show up in the macroeconomic data. But i would expect them to begin to show up in the second half of 2019, about where we are now or later this year. In the first half of 2020. That is when i with think the maximum impact of the seachange in Monetary Policy would occur. Here is a picture that shows this whole sequence of events. You guys have this picture etched in your mind anyway, so you know this. It goes to november 8, 2018. The first vertical line, all the way to the june 19 decision, and again, the june 19 decision, we did not actually lower the policy rate at it sent a strong signal that we would lower the policy rate at the next meeting which we followed through with on july 31. I would not necessarily say that the right things do not happen after the july 31 meeting. That decision was effectively made more or less of june 19 meeting. Anyway, no matter how you want to look at this, this is a big change in u. S. Monetary policy. Let me talk about some of the conditions that drove this. I think the biggest one is probably just that as we have been anticipating for a long time, the u. S. Economy would probably slow down to its potential growth rate. We are talking about an economy that is growing at an above potential rate of growth. I am sure you are all predicting it, that it will slow down to the potential growth rate Going Forward. The revised figures on gdp have the economy growing at 2. 5 in 2018. 2019 growth has been expected to be slower, although i will hold out a little bit of idea that maybe 2019 will not be worse than 2018 as far as growth. I think there is some potential. It is not my base case, but a potential for growth to be 2. 5 or even better in 2019. We will see if that holds up or not. Part of that might come from more accommodative Monetary Policy as i have described it. We have had this key risk on the horizon, and all of you have been coping with this too, that trade uncertainties might cause the natural slowdown to be sharper than anticipated. And you would get something skirting around 1 growth or Something Like that. Here is a picture, i love this picture, so i will dwell on it for a while. This is a picture, starting in march 2017 and continuing out over the forecast horizon. This is the u. S. Real gdp growth rate. It is measured from one year earlier. It has moved out a bit compared to the way we usually look at it. The blue line is the actual data. The dotted line on the lefthand side is the march 27 2017 fomc projection for gdp growth. What did the fomc think in the first half of 2017 . Oh, the economy will grow at 2 as far as the eye can see. And on the righthand side, the dots, the dotted line is the current projections from where we are today. He can see the blue line obviously ratcheted up quite a bit during 2017 and 2018. The yearoveryear growth rate did reach 3 middle of last year and Third Quarter of last year. Yearoveryear growth rate has been declining since then as predicted, and as we would have all expected, that growth would come back to the potential growth rate and the dotted line on the right says it is expected to continue to decline back to the potential growth rate. Look at the upside surprise compared to march 2017 about how much more growth we got in the u. S. Economy than what was expected as of that time. That was the upside surprise. On the righthand side is the expected slowdown. The risk here is that the blue line goes down more than you would think. And possibly because of trade uncertainty, and that is why i think the fed has taken out some insurance against that possibility by providing a more accommodative Monetary Policy over the last six months. It certainly seems, based on recent of elements, that it will be hard to get a stable trade regime and environment over the nearterm. Or over the forecast horizon, which i would describe as two to three years. I think there is no question that this is chilling Global Investment and slowing the Global Growth rate. That seems to be factored into almost everyones forecast. If you feed trade restrictions into a model, you will get out that the trade restrictions direct effects are probably small. But, there can be other knock on effects, mostly coming through Financial Markets and other sources that can be much larger. There is some risk and uncertainty here about what the effects of this increased trade uncertainty will be. I would stress this, we are in a titfortat trade war, and it is not in any titfortat trade war, each side is going to make threats and counter threats at any point in time. These might be daily, might be weekly, might be monthly. The nature of a titfortat trade war is that there are threats and counter threats occurring all the time. Some of these might be implemented. At some of these might not get implemented. The nature of the war is that you have titfortat going on all the time. It is not reasonable for Monetary Policy to respond to all of these threats and counter threats. If you did that, you would get a very volatile Monetary Policy and you would be contributing to the volatility being caused by the trade war. I dont think that is the right way to think about how Monetary Policy can take the situation into account. I want to think instead of trade regime uncertainty as simply being high. It is just high and it will be high for the foreseeable future, because it is going to be very hard for the various sides to repair trust and to get back to a stable trade regime over the forecast horizon. We have already taken that into account. Trade regime uncertainty is high. And we are putting that into the Monetary Policy calculus. We have used Monetary Policy in reaction to that, through the accommodation that i have described earlier. Particular threats on counter threats are not news because that is part of the way the and certainty plays out over time in a titfortat trade war. Im not expecting the uncertainty to go away but we have tried it to take out insurance of the possible damage the trade war could do to the u. S. Economy. Here is a picture, this uses the baker bloom and davis measure of policy uncertainty with respect to trade. It was low, low, low, low, low, high. That is how i read this picture. It was low all through the 2000s or even before that. I would describe it as the u. S. Leaving the drive to trade drive to trade liberalization. The culmination in the entry of china into the wto in 2001. And since then, a fairly stable trade regime with reasonable certainty about what the trading arrangements were going to be and what the tariff arrangements were going to be. But that has exploded since trade has become much bigger political issue. I would say not just in the u. S. , not just in the Republican Party or this administration, both Political Parties in the u. S. And politics all around the world now questioning global trade arrangements. That is why i do not think this will go away. You have opened pandoras box. These are difficult issues. You will not be able to put them back in the box. We are going to have trade regime uncertainty as described on the righthand side of this charge for as far as the eye can see. Like i say, that is from our point of view as Monetary Policymakers, we have to take that into account. We have about insurance against the effects this may have on economic growth. We have other concerns meanwhile that are bubbling in the background. One of them is muted inflation. We measure this as pce inflation. Headline inflation. A lot of times, we will look at core inflation to get an idea of some sort of underlying gauge of inflation pressure. Both inflation and Inflation Expectations are below target. I think this is surprising because this is occurring despite the upside surprise in the economy that i described earlier, which has been ongoing from 2017, 2018, and even the first half of 2019. All of that has been above potential growth in the u. S. Economy, stellar performance of labor markets in the u. S. Economy, and nevertheless, our core pce inflation measure from one year ago is only 1. 6 . I think this is a concern. We would like to see inflation at or above target in this environment. Here is a picture. Im experimenting here wi