Fed’s Bullard wants to raise benchmark interest rate to 3.5% this year

St. Louis Federal Reserve Chairman James Bullard said Thursday he wants the central bank to raise its benchmark interest rate by 3 percentage points by the end of the year.

“We have to move,” Bullard said during a panel discussion with reporters following a conference at the University of Missouri. He said his prime rate was 3.5% in the second half of this year.

Bullard played down talk that U.S. rate hikes would push the economy into a recession, saying the U.S. expansion “is not ‘old’ and can continue for a long time.”

Real GDP will continue to grow at a slower but still robust pace of 2.8% in 2022, despite a relatively weak reading in the first quarter due to the omicron variant and the Russian-Ukrainian war, he said. .

Furthermore, “labour markets are robust and should improve further in 2022,” he said.

In fact, the US unemployment rate will likely fall below 3% later this year, an event that hasn’t happened since the 1950s, he added.

The president of the St. Louis Fed is a voting member of the Fed’s interest rate committee this year.

Last month, the Fed raised its benchmark interest rate for the first time since 2018, taking the federal funds rate from near zero to a range between 0.25% and 0.5%.

Bullard said he was inclined to support a 50 basis point rate hike at the Fed’s next policy meeting in early May, but said he reserved final judgment until the meeting proper.

Even if the Fed acts aggressively, the Fed’s key rate will be below “neutral” until it gets much higher, Bullard noted. The Fed estimates the “neutral” level at 2.25%. So according to Fed theory, the Fed will put upward pressure on inflation until rates reach that level.

“Even if you raise the policy rate significantly in future meetings, you will still be below this neutral level. That’s why I’ve been intrigued by a lot of the chatter that we’re going to cause a recession or something,” Bullard said.

“I think those initial moves are relatively inexpensive and we can do them relatively quickly,” he said.

“Once we get higher,” officials can debate whether they’ve gone too far and are putting enough downward pressure on inflation, he said.

In his speech, Bullard said the Fed was “behind the curve” on inflation, but not as far as some have suggested.

Former Fed Governor Lawrence Lindsey recently argued that the Fed needs to get its federal funds rate higher than the rate of consumer price inflation — about 8% — in order to lower the inflation.

However, Bullard said that was conventional wisdom in the 1970s, but he argued that the Fed had refined its tool, especially forward guidance, over the past 50 years.

Already, Fed communication was a key factor in the recent increase in the 2-year Treasury yield TMUBMUSD02Y,
2.581%
and the 30-year mortgage rate, he said.

“It looks like we barely lifted a finger, but that number has moved a lot,” he said.

The widely followed rules for Fed monetary policy, developed by Stanford University economist John Taylor, now suggest that the Fed’s benchmark interest rate should be 3.5%.

While the Fed’s key rate is much lower, the yield on the 2-year Treasury note was 2.43% on April 4. That’s just 100 basis points from Taylor’s rule level, Bullard said.

“This suggests the Fed isn’t as far behind the curve, although it still needs to raise the policy rate to ratify forward guidance,” he said.

“It just means that the tighter policy is already partly in the markets and already having effect today. To the extent that we will be able to control inflation, it is because part of this is happening. already in the first half of 2022, you don’t have to wait for the policy rate to rise in the second half,” he said.

“The Fed needs to follow” and raise rates, Bullard added.


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