By any measure -- speeches delivered (more than 10), headlines generated (more than 100), time zones crossed (at least 12) the amount of face time this man has received in 2012 is unusual for a Federal Reserve official. In fact, he says, he's getting so much public attention that strangers are recognizing him on airplanes.
What makes this case particularly strange is that the official isn't Ben Bernanke, the bank's bearded (and often beleaguered) chairman. Nor is it a presidential appointee, with a direct line to the White House. It isn't even a permanent voting member on the group's all-important Federal Open Market Committee, or FOMC. And yet, James Bullard, the boy-faced president of the Federal Reserve Bank of St. Louis, is arguably one of the most influential voices in one of the most influential policy-setting institutions in the world -- where every decision (and mere hint of a decision) affects investors, mortgage refinancers, student-loan applicants, entrepreneurs seeking capital, retirees seeking income and virtually everyone in between.
Indeed, in the past couple of years, veteran money managers and Wall Street analysts have taken to following the 51-year-old Bullard's every public utterance. The research firm Macroeconomic Advisers has found that Bullard's words moved the markets more than the comments of any other Fed official in 2011 -- including Bernanke. Take, for example, what happened in May of 2011, when Bullard spoke to a convention of bankers in Arkansas. Just after the St. Louis bank chief signaled that the Fed wasn't in a hurry to start removing stimulus from the economy -- hardly the conventional wisdom at the time -- the bond market exploded. Within minutes of Bullard's speech, billions of dollars in bonds changed hands, and interest rates on the two-year Treasury note dropped like a stone.
These days, William Larkin, who helps oversee about $500 million in assets for Cabot Money Management, is vigilant about checking the calendar for upcoming Bullard speaking engagements and TV appearances. "He sends policy signals through the media," says Larkin. "You have to pay attention."
And yet as surprising as Bullard's outsize influence is, the reason for it may be even more so, say insiders and analysts alike: Bullard's peers on the Fed committee, they point out, respect this Midwestern research wonk in large part because he has an "open mind." He won't let some purely philosophical view of the economy -- conservative or liberal, hawkish or dovish -- dictate a decision, several experts say. "He's not firmly entrenched, and this makes his positions more credible," says Jeffrey Cleveland, senior economist at investment management firm Payden & Rygel, which manages more than $70 billion. And, if that isn't enough, there's one more reason to think Bullard's influence on Fed policy will only grow in the coming months. Starting in January, he actually gets to vote.
Gas pedal and brake. For generations, these have been the two tools of federal monetary policy. Step on the gas -- which is to say, lower the short-term lending rate charged to banks -- and the economy, in time, revs faster (which, unfortunately, pushes prices higher too). Tap on the brake (hike interest rates) and fewer people borrow, businesses grow at a slower rate, hiring loses steam and prices remain steady or even fall. By the time Bullard ascended to the top spot at the St. Louis Fed, he was well known as a brake man -- a guy who, given the dismal choice of either anemic growth or smoldering inflation, would always choose the former.
Part of that was due, of course, to where he worked. When Congress set up the Federal Reserve system in 1913 (as a way to limit Washington's influence on the economy), it created 12 banking districts, instead of just one central bank that might be vulnerable to political pressure. Each district Fed, in essence, became the bank every other financial institution in the region could turn to for credit; it wasn't long, experts say, before each developed its own economic personality. The St. Louis Fed, whose jurisdiction stretches across parts of seven states, from Arkansas to Tennessee, has historically been one of the most fearful of runaway inflation. "The tradition of the bank is very hawkish," says Bullard, from his fourth floor corner office at the Fed's gray limestone fortress in downtown St. Louis. "I think its role is definitely to be a guardian of price stability."
Bullard was steeped in that philosophy as well. A native of Forest Lake, Minn., a small town hugging one of the state's largest lakes, he graduated from St. Cloud State University in 1984 and took a job writing computer programs for an insurance company, before going back to graduate school in economics.
After earning a Ph.D. from Indiana University in 1990, he joined the research division of the St. Louis Fed and never left. He publishedstudy after study on esoteric economic subjects (often with a hawkish bent). Bullard's papers didn't exactly fly to the top of the bestseller list, but they got him noticed among his bosses within the bank. He quickly ascended the ranks to deputy research director.
When William Poole, the bank's president, announced his retirement in fall 2007, Bullard quickly became a contender for the post. Bob Jones, CEO of Old National Bancorp and a member of the St. Louis Fed's board of directors, said all candidates the board interviewed had strong research chops. But what set Bullard apart was his ability to relate to workers at all levels of the Fed's food chain. "He's an empathetic listener, plus he's so dang smart," Jones says. At the age of 47, Bullard became one of the youngest ever to be named a Fed bank president.
It was a short honeymoon. Immediately after taking office on April 1, 2008, the new St. Louis boss got the traditional welcome call from chairman Bernanke. "He might have said congratulations in there somewhere," Bullard says, laughing. But the rest of the discussion was devoted to one subject: the frenetic aftermath of the sale of troubled investment bank Bear Stearns.
Bullard's conservative economic training made him cringe at the Fed's involvement in the deal. By September, when Lehman's collapse was imminent, the St. Louis chief admits, he "was an advocate of letting Lehman fail." What he didn't fully understand at the time, he now says, was Lehman's deep connection to another financial giant, insurer AIG -- and how the same sophisticated financial contracts (known as credit-default swaps) that brought down Lehman, and Bear Stearns before it, would come back to haunt so many other big banks. That, for Bullard, was a paradigm-shifting realization.
And so when the U.S. economy was still stalled in 2010, Bullard surprised many by advocating a hands-on approach for the Fed in stimulating the economy. There was one thing even more frightening than inflation, after all: That was deflation. "I was worried we might get into a deflationary situation like Japan," he says -- a situation in which interest rates were at zero, prices spiraled downward and stock values still didn't grow for a decade. It was the economic equivalent of a vampire bite: a living death.
When a seeming hawk like Bullard began promoting unusual policies that went beyond traditional interest-rate adjustments -- such as the Fed's huge Treasury bond purchases through the "quantitative easing" program now known as QE2 -- it became easier to build consensus at the Fed, experts say. Ironically, the only consensus Bullard could draw within himself, he admits, was that his past experience with monetary policy didn't count for much. For the first 18 years Bullard worked at the St. Louis Fed, he understood all the issues, he says: "Everything about monetary policy was about adjusting the funds rate up or down," says Bullard. "Now, everything is just completely upside down. I just can't emphasize that enough."
This week, Bullard will make another journey to Washington, for the next critical meeting of the FOMC, when the Fed will present its summary of economic projections and announce what actions, if any, officials plan to take to stimulate the flagging economy. The 17 committee members meet at a large conference table; Bullard happens to sit in the chair long occupied by the most famous Fed chairman of the modern era, Alan Greenspan. It's not customary to talk esoteric economic theory at these meetings; some of the committee members are bankers and lawyers, not economists. But it's a fair bet, insiders say, that won't stop Bullard.
During one meeting, he began talking about good and bad "equilibrium," an inflation-related topic that even many economics doctoral students might have to look up. Bullard was met with several blank stares, so he started drawing some graphs on the legal pad in front of him and then asked Fed staffers to make copies of the graphs for the committee. Fellow members were not used to getting such on-the-fly handouts, says Bob Rasche, the former research director of the St. Louis Fed and an attendee of the meeting.
When it comes to one key issue, though, Bullard is anything but wonkish. He says one of the biggest challenges the Fed now faces is explaining to an ever-skeptical American public why and how the country's "bank of last resort" does what it does. Especially because he sees the economic turbulence continuing for some time.
"You need to remember what a serious toll the bursting of the housing bubble took on the U.S. economy," Bullard told SmartMoney in an interview this spring. "People are underwater on their mortgages, a lot of people are out of work -- these things take a long time to fix." And part of that communication effort to the American people, he says, will entail changing some longstanding academic practices at the Fed.
Even the way government economists measure inflation is somewhat ludicrous and out of touch, he says. Most Fed policymakers base their monetary decisions, in part, on what's called "core inflation," which excludes the often-volatile costs for food and energy. But those are the two places -- the grocery store and the pump -- where Americans most acutely feel the bite of inflation, say Bullard and many other experts. "If you tell people I'm not paying attention to those prices when I'm thinking about inflation, it's a killer in terms of credibility," Bullard says. Economists tend to use the core inflation measure, he contends, not because it reflects the actual experience of consumers, but because it's easier to plug into their elaborate mathematical formulas. "As policymakers, we can't be saying, 'Gee, I'd like to simplify my problem by picking something smoother!'"
When the Fed meets Wednesday and Thursday, many market participants predict, officials will launch a third round of bond-buying, dubbed QE3, to spur the economy. Last Friday's jobs report was the latest in a string of disappointing data points that FOMC members watch to gauge whether to take further action. Yet Bullard would like to temper the committee's approach to these types of stimulus programs. "I think the committee would be far better served if we could move in smaller increments and then react to data as it comes in about the economy, instead of having to make almost an all-or-nothing sort of decision, which is what people have in mind about QE3: Either we're going to come in, in a huge way, or we're going to stay out completely," he says. With the first two rounds of quantitative easing, the Fed announced upfront that it would buy hundreds of billions of dollars' worth of bonds.
To be sure, not everyone sees the St. Louis president as the opinion leader who matters most. "Ultimately, it comes down to Bernanke, [Janet] Yellen and [William] Dudley," says Jason Brady, manager of the $546 million Thornburg Strategic Income fund; Yellen, a presidential appointment to the Fed, and Dudley, president of the New York bank, are so-called permanent members of the FOMC and vote at every meeting. And Bernanke, of course, is the powerful Fed chairman. Bullard, for his part, dismisses any notion that any one "subgroup is dictating to the whole group." He says, rather, that the institution works precisely because it's a body of consensus.
The aim is to set -- and stick with -- policies that keep the economy growing modestly for years. Interest rates can't change by leaps and bounds each quarter; lenders have to count on a steady money supply; shoppers and sellers need stable prices. And so whatever decisions are made when more than a dozen far-flung committee members meet have to be, generally, of one voice, Bullard says. "Most of the time," he says, "The vote is, 'Yes, Mr. Chairman.'"