James Bullard
Olivia Michael | CNBC
St. Louis Federal Reserve Chairman James Bullard said Tuesday he still believes the economy can avoid a recession, although he expects the central bank will need to raise interest rates further to control inflation.
“I think inflation came in higher in the second quarter than I expected,” the central bank official said during a speech in New York. “Now that that’s happened, I think we need to go a little bit higher than what I said before.”
The fed funds rate, which is the central bank’s benchmark, will likely need to rise to 3.75% to 4% by the end of 2022, Bullard estimates. After four rate hikes this year, it currently stands at 2.25% to 2.5%. The interest rate sets the level at which banks charge each other for overnight lending, but affects many consumer debt securities with variable interest rates.
Still, Bullard said the Fed’s credibility in its commitment to fighting inflation will help avoid weighing on the economy.
Bullard compared the Fed’s current situation to the problems faced by central banks in the 1970s and early 1980s. Inflation is now at its highest level since 1981.
He expressed confidence that the Fed does not need to drag the economy into recession today like then-Chair Paul Volcker did in the early 1980s.
“Modern central banks have more credibility than their counterparts in the 1970s,” Bullard said during a speech in New York. “Because of that… the Fed and the [European Central Bank] may be able to blow out in an orderly manner and achieve a relatively soft landing.
Markets have been making the opposite bet lately, that a hawkish Fed will raise rates so much that an economy that has already had several quarters of negative GDP growth will fall into recession. Government bond yields have fallen and the spread between those yields has narrowed, which is generally a sign that investors are skeptical about future growth.
In fact, futures prices suggest that the Fed will have to follow up its rate hikes this year with rate cuts as early as the summer of 2023.
But Bullard argued that the Fed’s ability to steer the economy toward a soft landing depends largely on its credibility, particularly whether financial markets and the public believe the Fed has the will to halt inflation. He distinguished this from the 1970s era when the Fed raised interest rates in the face of inflation but quickly backed out.
“That credibility didn’t exist in the earlier era,” he said. “We have a lot more credibility than we used to.”
Bullard will appear on CNBC’s “Squawk Box” at 7:30 p.m. ET Wednesday.
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