In a speech on Monday, St. Louis Federal Reserve President James Bullard expressed confidence that the U.S. economy may be able to avoid a rough recession, despite the necessity of raising rates to keep inflation under control.
He made the statement during a speech delivered to a gathering of New York University’s Money Marketeers. While he conceded that inflation turned out to be worse than expected, Bullard still believes that a recession is avoidable.
Rising rates
Bullard predicted that the central bank would raise the fed funds rate again. The end of the year 2022 is likely to see the rate going as high as 3.75 percent to four percent. This is despite the fact that the Fed already raised the fed funds rate four times this year alone, with the rate currently sitting at 2.25 percent-2.5 percent.
The aggressive rate increase has caused the markets to worry. After several consecutive quarters of negative GDP growth, a steep rate increase is liable to drive the economy into a recession. This pessimistic view can be seen in the downward trajectory of government bond yields, which indicates funds moving from the stock market into the safer bond market. The Fed may have to follow its rate increases with cuts next year based on future pricing indicators.
The Fed’s position on rates
Bullard’s position on rates is supported by his colleagues. Earlier in the day, three of his colleagues expressed their united commitment to raising the U.S. interest rates in order to rein in inflation. Fed Presidents Mary Daly (San Francisco), Loretta Mester (Cleveland), and Charles Evans (Chicago) in separate appearances struck the same hawkish tone as Bullard.
When interviewed by the Washington Post, Mester said that she would like to see months of evidence of declining inflation before considering any rate cuts. Similarly, in an interview hosted by a CNBC anchor, Daly said that she expected the Fed to keep raising rates for now, as the Fed’s effort in curbing inflation is “nowhere near” done.
Jerome Powell, Fed Chair, revealed last week that in its mid-September policy meeting, the central bank may consider another large rate hike in response to the current inflation rate, which is the highest in four decades. In a question-and-answer session on Tuesday, Evans indicated to reporters that he would support the move if inflation did not decline.
Public credibility
In the early 1980s, Fed Chair Paul Volcker dragged the economy into a severe recession when he raised rates to punish levels in order to lower inflation, only to quickly back down.
Bullard believes that the Fed currently has a lot more credibility in the eyes of the public and the financial markets. The central bank has shown that it has the will to rein in inflation, which should reassure the people. This credibility will make it possible for the Fed to steer the economy to a “relatively soft landing.”
His confidence extends to the Fed’s European counterpart, the European Central Bank. In June, the ECB made a similar move by signaling additional rate hikes ahead.
The war in Ukraine plays a part in sending oil and food prices sharply higher, fueling inflation and affecting consumer spending, particularly in Europe.
“The old, pre-corona equilibrium, with low inflation, ultraloose monetary policy and low geopolitical risk premiums no longer holds,” Portfolio Management Head Andreas Koester said last month at Union Investment in Frankfurt, Germany, as per PBS
“Now we are in a transition to a new, post-corona equilibrium, of which only the outlines are visible, such as higher inflation levels or a return to great power competition on the international scene.”