Gold ‘Runs Up’ When Fed Credibility Erodes | Former Fed President Jim Bullard

Welcome back. I'm Jeremy Safran. Great show for you today. The chairman of the Federal Reserve stood up in Wyoming this morning and put five and a half years of inflation on his own institution. His words, the responsibility sits squarely with the central bank, and that is where it belongs. Now, if you've spent years arguing the central bank is why your money buys less, that's about as close as you're going to get to hearing it said back to you. What he didn't say is what he's going to do about it. Look at markets. They decided anyway here. A rate hike next month went from a long shot to the base case in about an hour. Now, my guest today spent 15 years in that room. He once dissented because he thought they were moving too slowly. Stay with us. All right. Jim Bullard ran the Federal Reserve Bank of St. Louis from 2008 to 2023, 15 years in the room that sets American interest rates. Now, the financial crisis, zero rates, the pandemic and the inflation that came after it. In March of 2022, he dissented because he thought that the committee was moving too slowly. He wanted half a point instead of a quarter, plus a plan to start shrinking the balance sheet. Then he published an explanation so anyone could read his reasoning, which is worth remembering this morning because the man who just spoke won't do that. He's now dean of Daniel School of Business at Purdue University. Dean Bullard, welcome to Kiko News. Thanks for having me. I got to ask you, I mean, in plain English, did Kevin Warsh just prepare the country for a rate hike in September? Yeah, market probabilities certainly shot up after this speech. He seemed to indicate that he is more open to a rate hike than was previously thought. I think he aligned himself with the center of the committee, I would say, which is all all of which are hinting that they'd be willing to raise rates if inflation doesn't come down more than has been expected so far. Yeah, well said. Just for a kind of a live look here. I mean, the two points, the two year Treasury yield jumped nine basis points. A basis point is 100 of that percentage. I mean, the whole front of the curve went with it. The 30 year didn't move at all, still five point one percent. When he started talking, I mean, the market had September at around 36 percent. It's been climbing all morning and it's now close to about 60 percent. A cut is, you know, almost zero. I mean, it doesn't feel like it's knee jerk. It's been repricing in one direction for three hours. The currency, I feel like, did more than the yield curve today. I mean, euro down 1.6, yen approaching 160. Why is the dollar carrying this rather than the bond market? Yeah, it's a good question. I think markets aren't sure what to expect in the medium term. But they are more inclined to bet on a rate hike in the short term. So I think that's the pricing that you're seeing. On the dollar, I think there was maybe some worry that the combination of U.S. monetary policy and fiscal policy was going to run away a little bit. And this speech helped contain that to some degree. There was an interesting kind of quote. And I wanted to read this line to you. Just a direct quote. He said, there is one signal nobody can miss. The responsibility for 65 months of sustained elevated inflation sits squarely with the central bank. And that is where it belongs. That's his quote. So five and a half years. And he put it on the institution. He also voted to hold on July 29th. Nine to three. Fifth hold in a row. To put that into the next rest of what he kind of said this morning, I mean, inflation is the central bank's responsibility. Employment is full. Financial conditions, in his own words, are not restrictive. So what is the case left for holding? Yeah, good question. So I think, you know, some of the hawks like Beth Hammack have made the case even this morning that the data is already there. The committee is already saying that at the end of this year, the best they're going to be able to do on core PC inflation is something very close to three percent. And that's going to be very similar to where it's been in 2023 in December and 2024 in December, 2025 in December. So really made no progress across those years. And you have to get more restrictive if you're going to do that. But I've also made the argument that this is a good time to fight inflation. And I saw a little bit of that in speech here where, you know, he summarized the real side of the economy as being relatively good. You know, pretty strong growth. Certainly the AI boom going on. You've got the labor market seemingly, you know, very close to full employment. Certainly the unemployment rate very low by historical standards in the US. And so then he turns to inflation and clearly that's not going so well. So I think the case for getting more restrictive is is there. And it probably doesn't depend so much on, you know, hair splitting about the about the data. And anyway, the committee could could start in September or sometime in the second half of this year. And then they could see how the data come in and see if they wanted to make more moves going forward. So so all of this is is, I think, good news for markets. They were looking for a more explicit message from the chair and they got it. And I mean, to your point, if policy still isn't restrictive, is one quarter point increase enough or would September have to begin a sequence? What rate actually becomes restrictive in this economy? Yeah, I think I think that's a great question. And that's a little what a little bit of the reason why this has been maybe a momentous sort of moment for the central bank, because if you start going in one direction, usually that means you go more in that direction. It doesn't have to be that way. But but the committee would have to be prepared to go that way. And and it sounded today like like Chair Warshad joined the rest of the committee with that view. So then in September, now a kind of a test of institutional credibility of if he holds after making this diagnosis, does a momentous kind of speech become an indictment of the Fed's unwillingness to act? I don't know, necessarily. You could have a you could hold that. It could be hawkish nevertheless. And you could be more or less signaling that you'd move at the October meeting or at the December meeting. You've also got the dot plot here coming up in September. And I think that the September meeting is, ironically, the meeting with the most forward guidance, because that dot plot is saying what you're going to do by the end of 2026 on the on the funds rate. And so that's basically saying what you're going to do at the current meeting and at the next two meetings. And so that gives you quite a bit of very near term forward guidance coming from the dot plot. So I'm not quite sure what the plot will say. I think it will say probably one or on a hawkish side, maybe two policy rate increases by the end of this year. Probably one, I would say. And then they could put that one at at the October meeting or at the December meeting. So it doesn't. So I think because of that kind of dynamic, it doesn't suggest that they have to necessarily move at September in order to be hawkish enough to put down pressure on inflation. I wonder if it if it kind of creates a trap, because if the dots show hikes, then obviously the Fed delivers the forward guidance you were just talking about that Warsh has said has failed. But if they don't, then they contradict today's speech. So which side of that contradiction do you think matters more? Yeah, I thought I actually thought maybe what he would do here is get rid of the dot plot because of the September problem. But he didn't do that. So I think I don't know. I'd put 50 50 on that one. I'm not sure if I can wait. Which side will have the more risk? I get a kind of I have to ask you about this inside perspective. I mean, what does the room actually look like right now? I mean, the vote identifies obviously three. We've got Hammock in Cleveland, Logan in Dallas, Kashkari in Minneapolis. The minutes say several participants wanted that increase, which might be those same three. Then Schmidt, I think, just said this week he'd probably put himself in that camp. So from the inside of me, where does the committee center of gravity really sit? I think the committee is split pretty much down the middle. So ten to nine or one way or the other. I think a lot of people that are sitting on the fence could go be convinced to go either way. And and I think the speech today recognized that and stated the case, which is basically the main the main case that the committee is making as a whole, which is just that the real economy is doing quite well. The inflation has not come down. They may have to do more. There are temporary factors with inflation, but they don't look like they're going to dissipate fast enough to warrant the committee just staying on hold and not going a little bit higher. You published the framework and the reasoning behind your dissent. Warsh argues kind of the opposite, that publishing a reaction function misleads markets and ties the committee's hands. Is that legitimate flexibility or does it let a chairman avoid ever being held to a standard anyone can identify? Yeah, I think when when he's complaining about forward guidance, I think that that is more about the very explicit forward guidance. If he had come out today and said, you know, for sure, we're moving in September, for sure. We're not moving in September. That's overly prescriptive about what the committee will actually do. And at times that has gotten the committee into trouble. So past chairs have sometimes said, well, we'll likely tighten at a quarterly pace or something like that and then continued on that path for a while. And sometimes the data doesn't cooperate with the planned pace of increases or decreases. And so I think he's rightly said that the committee should get away from that. But he went a long ways today to say that, nevertheless, you can still explain your reasoning, which is what the markets have been clamoring for. And so he hit a good sweet spot today, I thought. Yeah, that's interesting. So is he kind of replacing that calendar guidance with regime guidance, telling markets the hierarchy of risks without promising, I guess, a path? And does that lower uncertainty or just raise the term premium because nobody knows the trigger? I argued against calendar guidance consistently all the time I was on the committee. And exactly because of that reason that sometimes the data doesn't go your way. And now you get into a bind. You said you'd go one way, but the data is telling you to go the other way. And then you have to make a decision and surprise markets one way or the other. So I think he's right to say that you shouldn't be doing calendar guidance. It should be state dependent. And, you know, he wants to also reduce the influence of, you know, hair splitting data on a little on tens or hundreds on the inflation rate or something like that. I think he's had less success there. But there I would just say that, you know, markets are markets and they're going to parse things right down to the smallest unit available. And I'm not sure you're really going to be able to get away from that part. Now, Dean Bullard, I want to kind of go to this part of the speech. I can't stop thinking about it because it's about a name he never said. I mean, in July, Warsh looked at rising long term yields and effectively blessed them. He said markets were learning to play the ball, not the referee. Three weeks later, Scott Besant looked at the same yield, said that they had been out of whack or at least that they've gotten out of whack. And he intervened and bring them back to what he called an equilibrium. And then this morning, I mean, Warsh said the Fed needs clear market signals. And I'm quoting him as unfiltered as possible. And then he listed them asset prices, the dollar, the cost of credit commodities and specifically the prices of trading volumes of Treasury securities here. So meanwhile, from September 9th, Treasury at least doubles its long end buyback from two billion dollars to four billion dollars per operation across the 10 to 30 year sectors. It came two weeks after the regular quarterly briefing where debt management changes normally get made. And the program was built in 2024 to support trading in older illiquid bonds. There was no sign of anything broken last week. Besant pointed at the level of yields instead of a program, I guess, built for plumbing now aimed at price. And obviously, he pressed the Fed this month to make dollars available to central banks so Tokyo could defend the yen without selling treasuries. I'm just curious. One man says the Fed needs the Treasury market unfiltered. The other keeps reaching for levers that kind of filter it. So, I mean, is that ordinary debt management or is it interest rate policy run out of the wrong building? Well, I think, you know, the Treasury secretary got a lot of pushback against that policy. But I do think, you know, you have to let the Treasury manage the debt portfolio the way they think is most efficient. And the Fed would just have to take that as input on what they would want to do. If you if you really thought that the Treasury was doing something that was inflationary, then that would require the Fed to push back against that. So hopefully, you know, it doesn't have to be some big battle between the Treasury and the Fed. I think that you can manage the debt policy without interfering with the Fed's 2 percent inflation objective and and get to good results. So hopefully that's where we'll go in the future. I appreciate Chair Walsh's emphasis on the idea that you want to take some signal from markets. You don't want to always be, you know, I guess one way I've described this is that the you know, this is a dance between the private sector and the Fed. And you have to have the idea that, you know, it's going to be about 50 percent market, 50 percent Fed. But I think Kevin has argued that, well, it's gotten out of kilter. It's like 90 percent Federal Reserve and only 10 percent market. So he wants to move it back to something that is in the middle. And I think that's appropriate. I don't think you want you want something that's so heavy handed on the part of the Fed that the market doesn't do its own pricing. That's interesting. I mean, so if Treasury has become, I guess, a third dancer, if the balance is supposed to be 50 Fed, 50 private market discovery, whose share is Treasury taking when it suppresses duration at the long end? I mean, the Treasury is just managing the debt. It's really the Congress and the president that are borrowing a lot of money. And there, I think the U.S. does not have a good policy. You've got six percent deficits as far as the eye can see. It wouldn't be so bad the level of debt that we're at. But there seems to be no concern at all in the political system to curb those deficits. And now you're looking at probably divided government coming up. That historically has not meant that anything can get done. So so you're really in, I think, global markets are really scratching their heads here about what the U.S. policy is. But as far as the Treasury is concerned, I mean, that decision has been made politically to borrow a lot and they have to arrange that borrowing as best they can. And and the Treasury secretary wanted to make this move. That's certainly up to him. But they have to do the best they can with the hand they've been dealt. So, I mean, does does preserving Fed independence eventually require it to raise rates even when doing so makes Washington's interest bill materially worse? Is willingness to kind of impose that cost the real test against fiscal dominance? Oh, yeah, absolutely. Every politician I've ever met thinks, you know, the nominal interest rate, whatever it is on that day, should be lower. Even when we were at zero, we had people lobbying us to move it lower. So I think, you know, from a political perspective, you can't ever be low enough. I think, you know, I'd like that group of people to get better at the macroeconomics so that they would not say that all the time. But that's that's what they say. And it's up to the Fed to say that, hey, you know, maybe maybe if we did a little bit more restrictive monetary policy today, then we wouldn't have to do as much later and we'd avoid getting into a crisis later on. All right. Now, Warr spoke last year about writing an updated version of the 1951 accord. He did not say those words today, but the original gave the Fed independence from Treasury and it kind of ended the practice of holding down what the government pays to borrow. So if a new accord means Besant reshaping the long and while Warsh leans on the short term rates, is that 1951 running in reverse? I mean, today, the front end moved nine basis points and the 30 year didn't move at all. What is the long end kind of pricing that the short end isn't? Yeah, the long end has to worry about overall fiscal position of the US and the path for that going forward. And the path is to head to, you know, 120 percent of debt held by the public or 150 percent of debt held by the public. And, you know, the market has to price whether they're they're going to demand a risk premium for that. I think that they are. And they're they're wondering what the US policy really is here being largely a peacetime economy. I know we're a conflict in the Middle East, but but certainly compared to the major wars that we faced, we're not in a wartime footing. So, you know, markets have to price that in. And I respect the market signal here. And so I agree with Chair Warsh on this. You want that signal to be as pure as possible. All right. So, I mean, both men are close to Stan Druckenmiller and he come out publicly basically against a buyback plan this week. I don't know if you read that article. Does that land inside the building? Oh, yeah, I think so. And I appreciated Stan's comments there. I'd align myself with that. I think it's it's really been very hard to try to intervene in this gigantic global market where you've got a lot of foreign buyers. You can do a little bit. But really, those are tactical moves. And and the the markets are pricing fundamental policy, not not the tactics day to day. You can see that you'll see movements day to day and that, you know, you'll see some fluctuation based on the intervention. But I don't think it's disrupt the long run trend by changing tactics. All right. Dean Bullard, when I first wrote to you, you were kind enough to respond. I wanted to ask how you read cooling monthly inflation against a still elevated annual trend. But that's inverted. I mean, a headline PC is three point seven percent over 12 months. The six month number is four point one percent. The short window is now the hot one. I mean, which I guess in plain terms for the audience means that the thing that's been eating your purchasing power for five and a half years is getting faster again, not slower. He went well through all hundred ninety nine items in that basket over the past year. Fifty four percent rose more than three percent in the two decades before the pandemic. That averaged 32 percent. He said inflation expectations are well anchored. He was looking at market prices when he said it. And then same morning, the University of Michigan survey lands household expects four percent inflation over the next year. Three point three over the next five to 10 sentiment fell to fifty one point seven. First drop in three months. So the market says anchored. People say four percent. Which set of expectations actually causes inflation? Yeah, I would listen to the market here. I think they've got money on the line. They're actually pricing inflation risk directly. So I think it's a better measure of inflation expectations. And the market is giving the Fed the benefit of the doubt. They do think that some factors are temporary that have pushed up inflation. And so I think I would go with that. I think the University of Michigan survey, as as long as it has been going on, is nevertheless eroded. Its credibility in recent years has become more and more clear that the respondents are saying something about the political climate and less about inflation directly. They don't have their own money on the line. It may be reasonable, a reasonable response to a survey to say, hey, the guy that's in charge is not my guy. And I think bad things are going to happen. So therefore, I'll say inflation is going to be high. That may be a reasonable response to a survey. But that's different than saying, are you really willing to put your money on the line and bet on that? And and that's what markets do. So I think the market sentiment is the one to go with on inflation expectations. Interesting. You know, I don't know if you caught this, but at the exact moment he started speaking, the BLS published its annual audit of last year. Jobs counts kind of got lost with the coverage, but seventy nine thousand fewer jobs than we were told. That's a tenth of a percent. So it's not a collapse. But private payrolls were revised down one hundred and seventy eight thousand while government was revised up ninety nine thousand. And he calls labor markets consistent with full employment. He also writes that when labor supply is barely growing, job gains naturally run low. Is that analytically right or is it kind of giving himself permission to stop worrying about employment so he can concentrate on prices? Yeah, I think that the main thing on the labor market is that you can't trust the nonfarm payroll employment number the way you could trust it in the decades of the past, because the immigration policy has changed dramatically under the Trump administration. That's been part of their program. And that has made the read of the nonfarm payrolls run rate instead of being one hundred thousand or one hundred fifty thousand is more like zero. And so then you're going to have to accept with zero. But with the same variance, you're going to have to accept some negative numbers, some months, even though that's consistent with a good labor market. And I think that's taking a long time for people to get used to. However, if you look at the rest of the labor market data and there are at least 20 or 30 other indicators of labor market performance and aggregate them into an index like the Kansas City Fed's index, it will tell you that the labor market is basically in equilibrium. It's very close to the net. The unemployment rate is very close to the natural rate of unemployment. So this everything is healthy about the labor market. What has changed is immigration policy is different than it was in the past. And we have to take that into account when we're assessing the labor market. Now, I kind of want to finish somewhere where you actually lived and it isn't the price. I mean, central banks have been net buyers of gold for the better part of two decades. They hold well over a billion ounces between them now. And you spent 15 years in rooms with the people making those decisions. I mean, the BIS, the international meetings, the side conversations. Did gold ever actually come up or is that kind of this thing that central bankers hold and never talk about? It doesn't come up very much in the U.S., but I do think the activity in the gold market, certainly according to people I've talked to overseas, it is a bigger issue overseas because you could say the foreign central bank might want to hold the gold instead of U.S. treasuries. There certainly have been banks that have been diversifying away from treasuries. And so I think there it's more of a factor. And I know markets have been betting one way or another against that in recent times. And, you know, gold still is an indicator of maybe lack of faith in the Fed. So normally you'll get gold running up if that credibility is being eroded. So I think in that sense, there is some signal there. And that's certainly something that is on the radar screen. Interesting. So it came up, but mostly overseas. Was it treated as a serious reserve asset or kind of that legacy holding nobody wants to be the one to sell? Well, I mean, the foreign central banks and foreign economies, they have a decision to make. They've got to hold reserves and they probably should hold a lot of reserves. That's been the lesson since the Asian currency crisis in the late 1990s. And how do they want to hold that? One way would be U.S. treasuries. And they certainly do that. They can hold other sovereign debt, which is pretty liquid. But they could also hold gold and maybe gold's one way to meet that requirement. As long as they think it's liquid enough and they can do what they need to do with the reserve holding. So to me, that's a little bit different problem than what the U.S. has. The U.S. doesn't really have to worry about these kinds of issues so much. And that's why you don't see U.S. central bankers talking about it very much. Certainly not a lot talking about it. And one more before I move on, because the United States holds about 261 million ounces of gold. And the government's book, it's obviously carried at that 42, 22 ounce statutory price. Congress said it. Only Congress can change it. But at that price, I mean, the whole hoard is worth about 11 billion. Today's price, it's worth well over a trillion dollars. Did that ever come up in the 15 years of meetings? And is an accounting fiction that size on the sovereign balance sheet something a central bank should care about? Or is it genuinely irrelevant? Well, you can mark that to market when you're when you're trying to do these calculations. I'm sure most people are very cognizant that the 42 bucks is not the right number. But, you know, in the in the big scheme of things, it hasn't been a major issue, I guess. I would say one other thing about this. You've got bitcoins sitting out there wanting to be virtual gold. And I think one of the things that happened in the last year is that physical gold turned out to be more desirable from these foreign central banks perspective than the bitcoin. So I think they've got a ways to go if they want to compete on this dimension and be be held by foreigners as part of their reserve holding. So I think that was to me, that was an interesting development. And of course, you know, we've talked to Judy Shelton and other people. There's been talk of revaluing it to create fiscal hedgeroom for the Treasury. Is that sound policy or just a gimmick? Why not mark to market? You know, I mean, everybody knows what the market price is. You see it every day. So but then I think if you did that, you'd have to live with the fluctuations that would that would happen. And the price goes down a lot. Then you have to say, well, no, we're going to mark to market. So it's always pretty much always better to mark to market and not have the book value misrepresenting what's really going on. So in that sense, I think I suppose it would take an action of Congress to do this. But, you know, they can make that decision. All right. Now, last thing on this, because he said something today that people watching this have argued for years and have been laughed at for. Let's play a clip. But my view is that money has something important to do with monetary policy. We should pay attention to money created by the central bank and money that comes from the banking and financial system. It's true that financial innovations subject of this conference and other factors alter the mechanics that link the monetary base, the velocity of money and the broader economy. But that is scarcely a reason to ignore the ultimate effects of money on financial conditions and prices. All right. So a Fed chairman putting money creation back on the table. Is that a genuine change in how the Fed thinks or is it a line in a speech? No, I think he would like to see at least some tracking of money. I think M2 growth skyrocketed in 2020, 2021 and then collapsed thereafter. And I think that did give an indication with those outside movements of where inflation was going to go. And so in that sense, I think, you know, you shouldn't, you know, probably the day to day changes in the money growth rate aren't very important. But outsized increases and decreases may be more indicative of what's going on. All right. I appreciate your time. Looking back over over the last year, just from a personal note, I mean, the leadership change, the dissents and Treasury moving closer to the bond market. I mean, which development would have seemed almost impossible for you when you were still inside the Fed? I don't know. We get ready for anything. I think that's the hallmark of a great, great central banker is that you don't rule anything out. You realize how much uncertainty is really out there. And and, you know, you don't you don't want to overcommit to courses of action that that you could get surprised on by the data. So I wouldn't really say that these developments were off the radar screen, but they have been surprising in other ways. Yeah. Yeah. Dean Bullard. Thank you. That was worth waiting for. Jim Bullard, of course, dean of the Daniel School of Business at Purdue and for 15 years president of the Federal Reserve Bank of St. Louis. I appreciate making the time. Thanks again. Great. Thank you. Thanks for having me today. All right. Now, the chairman said the responsibility for five and a half years of inflation sits with the central bank. He stopped short of saying what he'd do about it. The market didn't wait. A rate rise next month is now the base case and a cut is basically off the board entirely. Now, looking over at the metals, obviously a little bit of a sell off right now. Interestingly enough, though, silver still maintaining a little bit in this market down a little bit. Sixty six. So back below 70 dollars, which is an interesting kind of perspective here. Now we're going to have some great coverage coming up all next week long. I appreciate you all for watching Kikko News. Be sure to subscribe. I'm Jeremy Sappel for all of us here. Thanks for watching. Have a great weekend.