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Fed’s James Bullard Says Interest Rate Policy Is “Lagging the Curve”

James Bullard

Olivia Michael | CNBC

The Federal Reserve needs to raise interest rates dramatically to control inflation, but it may not be as “behind the curve” as it seems, Fed Chairman St. -Louis, James Bullard.

One of the most “hawkish” members of the Federal Open Market Committee in favor of tougher policy, Bullard said a rules-based approach suggests the central bank needs to raise its short-term borrowing rate benchmark at about 3.5%.

However, he said bond market adjustments to the Fed’s more aggressive policy, in which yields rose, suggest rates aren’t that far off.

“If you consider [forward guidance], we don’t look so bad. All hope is not lost. That’s the gist of this story,” Bullard said in a speech at the University of Missouri.

“You’re still behind the curve, but not as much as it looks,” he added. Markets are pricing in rates hitting 3.5% in the summer of 2023, a little slower than Bullard forecast, according to data from CME Group.

The comments come the day after minutes from the March FOMC meeting said officials were close to approving a 50 basis point rate hike, but settled on 25 points due to uncertainty. surrounding the war in Ukraine. One basis point equals 0.01%

In addition, members said they expect the Fed to begin shedding some assets from its nearly $9 trillion balance sheet, with the pace likely increasing to a maximum of $95 billion per month.

Both moves are an effort to control inflation at its fastest pace in over 40 years.

Bullard, a voting member of the FOMC this year, said Thursday that “inflation is too high” and the Fed needs to act. In the projections released in March, Bullard called for the highest rates among his committee peers. He said he wanted to see 100 basis points of increases by June. The benchmark federal funds rate is now in a targeted range between 0.25% and 0.5%.

“US inflation is exceptionally high, and that doesn’t mean 2.1% or 2.2% or anything like that. It means comparable to what we saw in the era of high inflation in the years 1970s and early 1980s,” he said. “Even if you are very generous to the Fed in interpreting what the rate of inflation really is today … you will have to raise the key rate significantly.”

The Fed uses “forward guidance,” such as its quarterly dot chart of members’ interest and economic expectations, to steer the market in the direction it thinks policy is going.

Judging by movements in Treasury yields, the market has already priced in aggressive Fed tightening. That means the central bank isn’t as far behind the inflation-fighting curve as it looks, Bullard said.

“The difference between now and the 1970s is that central bankers have a lot more credibility,” he said. “In the ’70s, nobody believed the Fed would do anything about inflation. It was kind of a chaotic time. You really had to get (former Fed Chairman Paul) Volcker in …that, people believed that the central bank would control inflation.”

Volcker’s rate hikes brought down inflation in the early 1980s, but not without triggering a double-dip recession.


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