St. Louis Fed's Bullard says central bank 'has a good plan in place' to slow inflation

Apr. 18, 2022 4:41 PM ETBy: Max Gottlich, SA News Editor16 Comments

Seal of the Federal Reserve System, currency concept.

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St. Louis Fed President James Bullard said that the central bank "has a good plan in place" to tame surging inflation, adding that "market pricing based on anticipated fed tightening is helping us keep inflation under control," he said in a virtual speech hosted by the Council on Foreign Relations.

Bullard emphasized that the Fed funds rate should be lifted to 3.5% at a minimum by the end of this year. That would be more than 300 basis points above the effective rate of 0.33% - recall the Federal Open Market Committee, the Fed's monetary policy making division, during its March meeting hiked the interbank lending rate by 25 basis points off the effective zero lower bound. Bullard added that he wouldn't "rule out" a 75 basis-point increase, "but it isn't my base case." This would be well above the Fed's typical 25 basis-point incremental hikes.

In addition to the Fed's already aggressive path for hiking the policy rate, Bullard wants balance sheet runoff to start at the Fed's upcoming meeting in the beginning of May. According to CME Group's FedWatch tool, markets are pricing in an 88.8% probability of the Fed funds rate reaching 0.75% to 1.00% at the May meeting vs. the current target rate of 25-50 bps. The chances that the rate hits 0.50% to 0.75% is just 11.2%.

His remarks were even more hawkish than just a month ago, when he called for a 3% Fed funds rate by year end.

"Rate hikes will bring inflation expectations down, lowering inflation without harming the labor market," Bullard said. He sees the unemployment rate heading down to under 3% this year vs. 3.6% in March, a historically low level. "The Fed can control inflation without a recession," he highlighted. Meanwhile, Goldman Sachs sees 35% chance of a recession, pointing to labor market headwinds.

In the beginning of April, Bullard said the Fed is behind the curve.

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