James Bullard, the former president of the Federal Reserve Bank of St. Louis from 2008-2023 and a former member of the Federal Open Market Committee, was named the dean of the Mitchell E. Daniels School of Business at Purdue University in July 2023. Bullard talked with Global Finance magazine recently about a wide range of issues. The interview was edited for length and clarity.
GF: How do you see the status of the US economy in the next 12 months?
Bullard: I think the US economy is in good shape for a soft landing. To me, soft landing means that output grows at the potential growth rate, that the job market is in pretty good balance, and that inflation is moving back toward target and isn’t too far from target. All those things are happening. And you know, GDP growth looks to me like the run rate is maybe between 2 and 2.5 percent for 2024, that’s pretty close to the potential growth rate, or a little above the potential growth rate. Inflation has been coming down toward target, and that’s going to enable the Federal Reserve to get going on the interest rate cuts.
GF: Do you then expect a rate cut in September?
Bullard: The committee was pretty clear at the last meeting and in the chairman’s press conference, that they are ready to go at the September meeting, unless something really dramatic happens. I think, you know, they’re about as clear as you can be for a central bank. I do think they’ll start in September with 25 basis points, and then the question is how fast do they want to move to get back toward a more-or-less restrictive stance of monetary policy, and so even when they lower the policy rate a little bit, the policy rate will still be restrictive. They have to continue to lower from that point. And I think it’s probably 25 basis points per meeting for several meetings in a row, until you can get down to a lower level of the policy rate, and then at that point, you could decide whether inflation is continuing to go to 2% or not, and whether you want to continue to normalize the policy rate.
GF: You see a cut of 75 basis points between now and December, right?
Bullard: Right.
GF: Do you expect big policy differences depending on who will win the US presidential elections in November?
Bullard: One thing I’ve said about this, is that this election does have a lot of uncertainty around it, because not just the White House is up for grabs in a close election, but also the House of Representatives and the Senate are very close. It’s not clear to me that either party will be able to win all three of those. I think divided government is a distinct possibility for the ultimate outcome. And in the US when there’s divided government, that usually means not too much gets done. And usually financial markets like that outcome. And so, I think that that’s been a factor that’s been driving financial markets during the summer here, but the election could change direction very quickly and either party, I would say, could still sweep. If one party sweeps, it will be able to do more, and probably wants to do more. And so that would be a little bit different.
GF: How do you explain the market crisis we had on August 5th?
Bullard: I would say that the dramatic sell off in US equities and global equities was partly due to the jobs report in the US. But if you look at that report, it was weak, but it was not that weak. I think what really exacerbated the downturn was events in Japan over the weekend and into Monday morning.
I think the [Bank of Japan] is trying to pull back some on its policy. It’s a very dovish policy that’s been in place for many years and, you know, attitudes have changed in Japan some, where they now think that a too weak yen is maybe counterproductive.
And I think that upset some of the carry trade that has been based on the idea that Japan will never do this. I think that’s what caused the big sell off, especially in Japan. I think the US jobs report was over interpreted, and then that was all exacerbated by the Bank of Japan.
GF: Why are financial markets so stressed?
Bullard: The geopolitical risk is very serious, and I do think we’re living with the [Gaza and Ukraine] wars going on, but they could easily metastasize into larger conflicts, either one of them, and markets do worry about that and that could be a big risk.
I think also maybe more pedestrian is just that the market is up a lot. The equity market is highly valued in the US and … I think that makes people nervous. They think that, you know, maybe those are overvalued, and the air will come out of that level. So, in that sense, they’re right to worry about that, and right to worry about these great companies, but do we really want to value them as how these were valued?
GF: Are you talking about a company like Nvidia?
Bullard: Nvidia, would be a classic, you know, classic one that went way, way up this year. You know, it’s a great company, and they’ve got a great product, and they’re selling a lot of it, but what’s the right valuation, I think, is the question.
GF: How do you see the global economic landscape beside the US?
Bullard: I would say the global landscape is less rosy than the US, because you’ve got China, which I think is struggling, at least by Chinese standards. China is struggling, not growing as fast as they used to. They’ve got clear fundamental problems in their real estate market, maybe elsewhere, and then Europe, which has not had as much growth as us, and has the war going on in Ukraine and has been more tied to, at least the leading economies have been, more tied directly to China. So China slowing down, it’s very clear more than the US. I would say that for global growth, it’s not as clear that we can get the kind of numbers that we’ve had in recent years. It’s a little bit slower there, and there’s more recession risk there than in the US economy.
GF: Do you expect trade tensions, and the decoupling between China and the US continuing?
Bullard: I think both parties in the US have decided that a more protectionist stance on global trade is something that they want to pursue. One of the hallmarks of the Biden administration was that it didn’t really reverse any of the policies of the Trump administration with respect to trade, and I would expect that to continue going forward.
[The attitude toward global trade] fundamentally, it’s more protectionist. It’s less globalist than it would have been even a few years ago, or certainly during the Reagan-Bush years. And I don’t see that turning around. I think we’re going to have more volatility from that dimension going forward, and I’m a little concerned that you could have markets anticipating a trade war even before one actually occurs because both parties, both political parties are talking about getting tougher on tariffs, maybe not only China, but everyone in the world. That would invite retaliation or threats of retaliation that could lead to a lot of volatility.
