Fed’s Bullard Says Rate Ceiling of 3.5% Assumes “Generous” Reading of Price Trends
2022.04.07 16:46
By Geoffrey Smith
Investing.com — The Federal Reserve may have to raise interest rates further than the market is currently expecting in order to bring inflation down, St Louis Fed President James Bullard said on Thursday.
Bullard, who has been out in front of his colleagues at the Fed in assessing the seriousness of the inflation surge in recent months, said in a speech that the Fed is still well “behind the curve” in the battle against inflation, and argued that even a “generous” reading of current data implies that the fed funds rate should be around 3.5%.
As U.S. inflation surged over the winter to its highest in over 40 years, interest rate futures and other derived market measures of expectations for Fed policy continued to reflect expectations that the central bank wouldn’t lift the fed fund rate much above 3%. The Fed had aggressively cut the fed funds target range to just above zero in response to the pandemic, as well as revved up its quantitative easing policy again.
However, it hiked the target range for fed funds to 0.25%-0.50% in March, the first rate hike since 2019, and the minutes of that meeting – released on Wednesday – indicated that many wanted a half-point increase instead, and were only persuaded to make a smaller hike by the uncertainty to the economic outlook caused by Russia’s invasion of Ukraine.
Bullard’s presentation acknowledged that the Fed may not be as far “behind the curve” as simple monetary policy rules of thumb would suggest. He noted the discrepancy between surveys of inflation expectations and the yields on inflation-linked Treasury bonds, and also said that the credibility of the Fed as an inflation fighter had already ensured that long-term bond yields hadn’t risen as far as short-term ones.
“Credible forward guidance means market interest rates have increased substantially in advance of tangible Fed action,” Bullard said. “By this second definition of ‘behind the curve,’ the Fed is not as far behind, but it must now increase the policy rate to ratify the forward guidance previously given.”
