A senior Federal Reserve official warned that it was a “fantasy” to think that the US central bank could sufficiently reduce inflation without raising interest rates to a level where they are restricting the economy.
James Bullard, chairman of the St Louis branch of the Fed, said the central bank needed to be more aggressive in its efforts to stamp out the highest inflation in four decades as he called for a rate hike to a point where they would actively curb growth.
The comments from Bullard, a voting member of the policy-setting Federal Open Market Committee and one of its top hawks, run counter to other officials, who are broadly aligned on the need to bring rates closer to a level “neutral” this year.
This is the level at which rates neither fuel nor restrict economic activity and is estimated to be around 2.4%. Bullard said the central bank would have to break that threshold as quickly as possible this year if it wanted to bring inflation closer to the Fed’s long-standing 2% target.
“There is a bit of fantasy, I think, in central bank policy today,” Bullard said in an interview with the Financial Times. “Neutrality does not put downward pressure on inflation. It just stops putting upward pressure on inflation.
“We need to put downward pressure on the component of inflation that we think is persistent,” he added. “Achieving neutrality won’t be enough, it doesn’t seem, because while part of inflation may naturally moderate…there will be a component that won’t.
His comments follow new inflation data which shows consumer prices rose at an annual rate of 8.5% in March following a spike in energy and fuel costs fueled by Russia’s invasion of Ukraine.
“Core” inflation, which excludes volatile items such as food and energy, is slightly below expectations, but Bullard warned that it would not decline without a concerted effort from the Fed and that states US was vulnerable to unforeseen shocks that could further push prices up.
“This [inflation] The report simply underscores the urgency that the Fed is behind the curve and needs to move,” he said.
Bullard backs the Fed raising rates by half a percentage point at the next policy meeting in May, which it urged the FOMC to do at its March meeting when it raised them. by a quarter point.
More officials are now backing such a move, along with an upcoming reduction in the size of the Fed’s $9 billion balance sheet.
He argued that the benchmark Fed funds rate should rise “sharply” after the May meeting and endorsed a 3 percentage point increase in the federal funds rate from its current range of 0.25 to 0.50. % by the third quarter.
Bullard acknowledged that such a level is “ambitious” in such a short time, but warned that the Fed’s credibility was at stake if it did not act.
“If the markets and households have the idea that the Fed is not going to do the right thing and is not going to control inflation, then you have to gain credibility by doing things that show them that you are serious” , did he declare.
Bullard pointed to former Fed Chairman Paul Volcker’s decision to raise rates to 20% at some point in the early 1980s, which contained inflation but led to a sharp economic contraction that resulted in millions of job losses. Volcker had no choice but to implement such a large increase “because the committee didn’t have enough credibility,” Bullard added.
“So far, I think we’re retaining our credibility, but if it falls apart, then it will be much more difficult to keep inflation under control in the future.”
Still, Bullard said he was optimistic the Fed would be able to cool the economy without causing a recession – as it did in 1994.