The Federal Reserve will likely need to keep its benchmark policy rate north of 5% for most of 2023 and into 2024 to succeed in taming inflation, said St. Louis Fed President James Bullard during an interview with MarketWatch.
“I think we’ll have to stay there all during 2023 and into 2024,” Bullard told MarketWatch’s economics editor Greg Robb. Bullard was responding to a question about how long he expects the Fed funds rate will need to remain in the 5% to 7% range.
Bullard added that it seems markets are still underestimating the degree to which the Fed will need to keep policy tight in order to rein in inflation, explaining that there is still some expectation that inflation might subside on its own.
A few weeks ago, Bullard caused a stir and provoked a brief selloff in U.S. stocks when he suggested during a presentation that the Fed funds rate might need to move as high as 7%. The Fed has already hiked the Fed funds rate by almost 400 basis points since the start of 2022. Presently, the upper bound of the Fed funds rate target is 4%.
have advanced over the past month as investors celebrated softer-than-expected inflation in October. However, Bullard is of the view that inflation will be stickier than investors expect, and it will likely take a while before it returns to the Fed’s 2% target.
“They will come down I think, that’s my baseline, but they probably won’t come down as fast as markets would like,” Bullard said.
Investors have long paid close attention to commentary from the St. Louis Fed president. However, Bullard will no longer have a vote on the Fed’s policy-setting committee come next year.
Asked about whether he would support a 75 basis point rate hike at the Fed’s December meeting, Bullard demurred, saying he would leave the exact “tactics” up to Federal Reserve Chairman Jerome Powell.
“In macroeconomic terms I’m not sure it matters that much at exactly which date we get there or what meeting we get there,” Bullard said, referring to the timing at which the Fed funds rate will reach its terminal rate — that is, its peak for this hiking cycle.
“Generally speaking I have advocated that sooner is better, that you do 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 chair as to how he wants to play the tactics on this,” Bullard said.
Asked about whether the low unemployment rate is helping to drive inflation higher, Bullard said he doesn’t believe the link between inflation and a tight labor market is as strong today as it has been in decades past.
“I’ve tried to de-emphasize the links between inflation and the labor market,” Bullard said.
“I don’t think that the feedback from the strength of the labor market to inflation is nearly as strong as many people portray it,” he said.
However, the fact that the labor market and underlying economy are as strong as they have been does, in Bullard’s view, give the Fed license to pursue a more aggressive approach.
“I do think that the fact that the labor market is so strong gives us license to pursue our disinflationary strategy now and try to get the inflation under control right now so we don’t replay the 1970s where the FOMC at that time took 15 years to get inflation under control,” Bullard said.
He also pointed out that the contraction in the U.S. economy seen during the first half of 2022 is “interesting,” and that the prevailing “slow-growth economy” would continue to help the Fed to achieve its inflation goals.
Finally, when asked if he thinks the Fed should consider adjusting its 2% inflation target, Bullard replied that he believes this is “a completely terrible idea for this environment.”
Even as the inflation moves toward the Fed’s target, Bullard believes the central bank will need to maintain its aggressive stance until inflation has receded all the way to 2%, lest they risk easing up prematurely and risk allowing price pressures to spiral out of control.
“We do have to maintain downward pressure until it’s clear that we’re going to achieve our 2% inflation target,” Bullard said.