The Federal Reserve will likely need to keep its benchmark policy rate north of 5% for most of 2023 and into 2024 to successfully control inflation, St. Louis Fed Chairman James Bullard said. during an interview with MarketWatch.
“I think we’ll have to stay there through 2023 and into 2024,” Bullard told MarketWatch economics editor Greg Robb. Bullard was responding to a question about how long he expects the fed funds rate to stay in the 5% to 7% range.
Bullard added that it appears markets are still underestimating the degree to which the Fed will need to maintain tight policy in order to keep inflation in check, explaining that there are still expectations that inflation could ease further. herself.
A few weeks ago, Bullard caused a stir and caused a brief sell-off in US equities when he suggested during a presentation that the fed funds rate might have to go up to 7%. The Fed has already raised the fed funds rate by almost 400 basis points since the start of 2022. Currently, the upper limit of the fed funds rate target is 4%.
rose over the past month as investors celebrated weaker-than-expected inflation in October. However, Bullard believes inflation will be more sticky than investors expected and it will likely take some time before it returns to the Fed’s 2% target.
“They’re going to go down, I think, that’s my baseline, but they probably won’t go down as fast as the markets would like them to,” Bullard said.
Investors have long paid close attention to comments from the president of the St. Louis Fed. However, Bullard will no longer have a vote on the Fed’s policy-setting committee next year.
Asked if he would support a 75 basis point rate hike at the Fed’s December meeting, Bullard balked, saying he would leave the exact “tactic” to the chairman of the Federal Reserve, Jerome Powell.
“In macro terms, I’m not sure it matters that much on what exact date we get there or what meeting we get there,” Bullard said, referring to when the federal funds rate will reach its terminal rate – c that is, its peak for this ride cycle.
“Generally speaking, I advocated that the sooner the better, that you want to get to the right level of the policy rate for the current data and the current situation, but I would defer to the president as to how whose tactic he wants to play on this,” Bullard said.
Asked if low unemployment is helping to push up inflation, Bullard said he doesn’t believe the link between inflation and a tight labor market is as strong today as it was it has been for decades past.
“I tried to downplay the links between inflation and the labor market,” Bullard said.
“I don’t think the feedback from the strength of the labor market to inflation is as strong as a lot of people portray it to be,” he said.
However, the fact that the labor market and the underlying economy are as strong as they have been, according to Bullard, allows the Fed to pursue a more aggressive approach.
“I think the fact that the labor market is so strong allows us to pursue our disinflationary strategy now and try to get inflation under control right now so that we don’t replay the 1970s when the FOMC at the time took 15 years to get inflation under control,” Bullard said.
He also pointed out that the contraction in the US economy seen in the first half of 2022 is “interesting” and that the current “slow-growing economy” would continue to help the Fed meet its inflation targets.
Finally, when asked if he thought the Fed should consider adjusting its 2% inflation target, Bullard replied that he thought it was “a completely terrible idea for this environment.”
Even if inflation moves closer to the Fed’s target, Bullard thinks the central bank will need to maintain its aggressive stance until inflation has eased to 2%, lest it risk slow down prematurely and allow price pressures to spiral out of control.
“We need to maintain downward pressure until it’s clear that we’re going to hit our 2% inflation target,” Bullard said.
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