James Bullard, President and Chief Executive Officer of the Federal Reserve Bank of St. Louis, speaks while speaking at the 2019 Monetary and Financial Policy Conference at Bloomberg’s European headquarters in London, UK on Tuesday, October 15, 2019. Photographer: Luke MacGregor/Bloomberg via Getty Images
For over a year, the Federal Reserve has been attempting to bring inflation down to its 2% target. Officials have been raising interest rates faster than any of their predecessors, and even after the second- and third-largest bank failures in US history this month — caused at least in part by the aggressive rate hikes — officials plan to continue at that magic 2% – Aim number.
“We have a mandate issued by Congress and the President to maintain stable prices for the US economy. It’s in the law,” Federal Reserve Bank of St. Louis President James Bullard told Bloomberg on Friday. “We have defined stable prices as 2% inflation. This is an international standard that was developed in the 1990s. I think it would be a disaster to drop that standard.”
Bullard argued that if he and other Fed officials gave up their inflation fight, it would make countries around the world “and we’d be back in the 1970s.” The roots of the so-called “Great Inflation” of the 1970s are still debated today, but it is widely accepted that a combination of President Lyndon B. Johnson’s aggressive spending on the Vietnam War and the social programs of the “Big Society” served to fuel the Poverty alleviation in the late 1960s, together with rising energy prices, easy monetary policy and the end of the gold standard, combined to create a nightmare scenario for price stability. Runaway inflation was only curbed after Fed Chairman Paul Volcker came to power in 1979 and hiked interest rates, triggering a double-dip recession.
However, Bullard acknowledged that the Fed has made progress in stabilizing consumer prices this time and said he expects it to continue throughout the year. Annual inflation, as measured by the consumer price index, fell to just 6% in February from a four-decade high of 9.1% last June. And the personal consumption spending (PCE) index — the Fed’s favorite indicator of inflation, which needs to fall to around 2% for officials to be happy — fell to 5.4% in January. February data will be released on March 31st.
But Bullard said he’s concerned some of the recent fall in inflation is due to falling energy prices, and these can be volatile, “so you don’t want to live and die in the international commodity markets.”
Still, with inflation easing coupled with recent bank instability, some experts are wondering why the Fed thinks it needs to keep raising rates. And why their 2% inflation target is so special.
Starwood Capital CEO Barry Sternlicht, for example, equated the Fed’s rate hikes to fight inflation in an interview with CNBC on Thursday, like “using a steamroller to drop the price of milk by two cents for a little fly.” to kill”.
The billionaire has been making this argument for some time. Back in October, well before the SVB collapsed, Sternlicht told Fortune that the Fed’s aggressive rate hikes could send the economy into recession or cause financial disasters. And he argued that officials should also reconsider their 2% inflation target overall.
“I think the number 2% is kind of arbitrary,” he said. “And could it be 3% or 4%? That would be nice.”
And economist Mohamed El-Erian warned in an interview with Bloomberg Television last month that the Fed cannot cut inflation to 2% without “destroying the economy.” “That’s because 2% isn’t the right target,” he added.
But the Fed, despite its critics, hiked rates by 25 basis points this week, reaffirming officials’ commitment to hitting the 2% inflation target, even if it means some “pain” for the economy — as Powell said at the last economic symposium in Jackson Hole famously said August. And comments by St. Louis Fed President Bullard on Friday only reinforced the move.
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