James Bullard, president of the Federal Reserve Bank of St. Louis, recently discussed the pandemic's fiscal-monetary reaction and its impact on inflation, emphasizing the need to offset the excessive inflation generated by the fiscal-monetary response.
Bullard's presentation, titled The Monetary-Fiscal Policy Mix and Central Bank Strategy, was given during a conference organized by Stanford University's Hoover Institution, according to a May 12 news release.
“The fiscal stimulus is receding, and monetary policy has been adjusted rapidly in the last year to better align with traditional central bank strategy. Accordingly, the prospects for continued disinflation are good but not guaranteed,” Bullard said in the release.
According to Bullard, too much inflation was produced by the pandemic fiscal-monetary reaction, the release reported. He said the fiscal-monetary response needed to be offset in order to get rid of the excess inflation.
Bullard advised considering the pandemic as a worldwide conflict that resulted in significant deficit expenditure together with supportive monetary policy, according to the release. Bullard said the deficit expenditure was utilized to provide transfer payments to affected workers and firms, which is shown in a substantial rise in personal saving relative to trend. The policy rate was drastically reduced as a result of the pandemic's impact on monetary policy in order to accommodate deficit spending.
“The spirit of the macroeconomic policy response to the pandemic was to err on the side of too much rather than too little,” Bullard said in the release. “This could be thought of as risking a high-inflation regime, as the monetary authority did not attempt to offset the inflationary impulse unleashed by the fiscal authority.”
Bullard reported an "encouraging sign that the switch to pre-pandemic fiscal-monetary policy is working" will come from market-based inflation expectations, the release reported. He noted the expectations were near 2% in the first quarter of 2021. After having spent the last two years at a higher level, the expectations "have now returned to levels consistent with 2% inflation."