St. Louis Federal Reserve Chairman James Bullard said on Tuesday he still believes the economy can avoid a recession, although he expects the central bank to want to keep raising rates. to monitor inflation.
“I think inflation got stronger than I expected in the second quarter,” the central bank legitimately said during a speech in New York. “Now that it’s happened, I think we’re going to have to go a little higher than what I said before.”
The Fed’s price range fee, which is the central bank’s benchmark, is most likely to drop to 3.75%-4% by the 2022 peak, Bullard estimated. It is currently between 2.25% and 2.5% after four price increases in these 12 months. The charge determines the extent to which banks set different prices for single-day loans, but powers many variable rate customer debt tools.
Still, Bullard said the Fed’s credibility in fighting inflation would help it avoid dragging the economy down.
Bullard compared the Fed’s current scenario to the problems central banks faced in the 1970s and early 1980s. Inflation is now working out the absolute best problems since 1981.
He said he was confident the Fed won’t have to drag the economy into a recession like then-Chairman Paul Volcker did in the early 1980s.
“Modern central banks have more credibility than their 1970s counterparts,” Bullard said throughout a speech in New York. “Because of this… the Fed and the [European Central Bank] may be able to deflate in an orderly fashion and achieve a relatively soft landing.
Lately, markets have been making the other bet, specifically that a hawkish Fed will raise rates so much that an economic system that has already persisted through consecutive quarters of damaging GDP expansion will slide into recession. Government bond yields were headed lower, and the spread between those yields has compressed, more often than not an indication that traders are skeptical of long-term expansion.
In fact, futures prices mean the Fed is expected to apply its fee increases this year with cuts as quickly as summer 2023.
But Bullard argued that how easy it is for the Fed to coax the economic system into a comfortable touchdown rests largely on its credibility, particularly whether or not money markets and the general public imagine the Fed has a desire to prevent inflation. He differentiated this from the generation of the 1970s, when the Fed decreed rate hikes in the face of inflation, but briefly reduced them.
“That credibility didn’t exist at the time,” he said. “We have a lot more credibility than before.”
Bullard will appear on CNBC’s “Squawk Box” Wednesday beginning at 7:30 a.m. ET.