St. Louis Federal Reserve President James Bullard said Tuesday that he still thinks the economy can avoid a recession, though he expects the central bank to keep hiking rates to control inflation.
“I think that inflation has been hotter than I expected in the second quarter,” the central bank official said during a speech in New York. “Now that this has happened, I think we have to go a little further than what I said before.”
The fed funds rate, which is the central bank’s benchmark, will likely move to 3.75%-4% by the end of 2022, Bullard estimated. It currently sits at 2.25%-2.5% after four rate hikes this year. Rates determine the level banks charge each other for overnight loans but feed through many adjustable-rate consumer loan instruments.
Even so, Bullard said the Fed’s credibility to fight inflation should help it avoid tanking the economy.
Bullard compared the Fed’s current situation to the problems faced by central banks in the 1970s and early ’80s. Inflation is now running at its highest point since 1981.
I expressed confidence that the Fed would not have to drag the economy into recession today as then-Chairman 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… the Fed and [European Central Bank] May be able to disengage in an orderly manner and achieve a relatively soft landing.”
Markets have been making the opposite bet lately, namely that a hawkish Fed will raise rates so much that an economy that has already endured consecutive quarters of negative GDP growth will slip into recession. Government bond yields have moved lower, and the spread between these yields has narrowed, usually a sign that investors are taking a dim view of future growth.
Indeed, futures pricing indicates that the Fed will have to follow up its rate hike this year with a cut as soon as the summer of 2023.
But Bullard argued that the Fed’s ability to steer the economy toward a soft landing largely depends on its credibility, particularly whether financial markets and the public believe the Fed has the will to stop inflation. He draws a distinction from the 1970s era when the Fed enacted rate hikes when faced with inflation but quickly backed off.
“In earlier eras that credibility didn’t exist,” he said. “We have more credibility than ever before.”
Bullard will appear Wednesday on CNBC’s “Squawk Box” beginning at 7:30 a.m. ET.