©Bloomberg. James Bullard, president and chief executive officer of the Federal Reserve Bank of St. Louis, gestures during his speech at the 2019 Monetary and Financial Policy Conference at Bloomberg’s European headquarters in London, UK, on Tuesday, October 15, 2019. Bullard said US policymakers are faced with under-inflation and the risk of a larger-than-expected slowdown, suggesting he prefers an additional rate cut as insurance. (Bloomberg) — President James Bullard of the Federal Reserve Bank of St. Louis said monetary policy benchmarks using “generic assumptions” indicate that the U.S. central bank may need to raise interest rates to about 3.5% to to prevent excessive inflation. “It is concluded that the current policy rate is too low by about 300 basis points according to this calculation,” Bullard said in prepared comments to the University of Missouri on Thursday. That could indicate that the Fed is “behind the curve” by that measure. The Fed last month raised its benchmark overnight rate by 25 basis points to a target range of 0.25% to 0.5% with Bullard, who favored a half-point hike, being the only dissenter. But the March 15-16 policy meeting released on Wednesday showed that “many” officials shared the same view, opting for the smaller increase only out of caution in light of Russia’s invasion of Ukraine. The minutes also revealed that many of them also noted that one or more half-point hikes could be appropriate to curb the highest inflation in four decades. Bullard cited a version of the Taylor Rule, a guideline developed by John Taylor of Stanford University that uses inflation, the unemployment rate and an estimate of the neutral interest rate — a rate that is neither contractive nor expansionary — to make his estimate of how high rates should disappear. Markets have already factored in Fed tightening in their pricing, with Treasury yields trading around 2.45%, or 1 percentage point lower than what might be needed, Bullard said. “This suggests the Fed is not that far ‘behind the curve’, although it would still need to raise key rates to reinforce forward guidance,” Bullard said. Bullard said he expects growth to grow at “a slower but still robust rate of 2.8% in 2022” despite a weak first quarter and the impact of the Russian invasion of Ukraine. He said the unemployment rate could fall below 3% this year. “The expansion is not ‘old’ and can go on for a long time,” he says. Turning to the yield curve, however, the St. Louis Fed chief said the recent inversion of parts of it could be a warning sign of growth. “This market-based signal is an accurate predictor of recessions in the post-war data, so it should be taken seriously,” he said, adding that there could be a number of explanations for low interest rates, including the large balance sheet of the Fed and safe-haven demand because of the war in Ukraine . ©2022 Bloomberg LP
