© . By Geoffrey Smith Investing.com — The Federal Reserve may need to raise interest rates further than the market currently expects to lower inflation, James Bullard, president of the St. Louis Fed, said Thursday. Bullard, who has stood before his colleagues at the Fed as they assess the severity of the inflation surge in recent months, said in a speech that the Fed is still “behind the curve” in the fight against inflation, arguing that even a “generous” reading of current data implies that the Fed Funds rate should be around 3.5%. As U.S. inflation spiked to its highest point in more than 40 years over the winter, interest rate futures and other derivative market measures of Fed policy expectations continued to reflect expectations that the central bank won’t hold the Fed Fund rate much above 3%. would bring. In response to the pandemic, the Fed had aggressively narrowed its target range of the Fed funds to just above zero, and again stepped up its quantitative easing policy. However, it raised the target range for fed funds to 0.25%-0.50% in March, the first rate hike since 2019, and the minutes of that meeting — released Wednesday — indicated many would instead raise a half. point, and were only persuaded to make a smaller rise due to the uncertainty over the economic outlook caused by the Russian invasion of Ukraine. Bullard’s presentation acknowledged that the Fed may not be as far “behind the curve” as simple monetary policy rules of thumb suggest. He noted the discrepancy between surveys of inflation expectations and yields on inflation-linked government bonds, and also said that the Fed’s credibility as an inflation fighter had already prevented long-term bond yields from rising as much as short-term bond yields. term. terms. “Credible forward guidance means market interest rates have risen significantly pending concrete action from the Fed,” Bullard said. “This second definition of ‘behind the curve’ means the Fed is not that far behind, but it now needs to raise its key rate to reinforce the forward guidance given earlier.”
