Fed’s James Bullard expresses confidence that financial system can obtain a ‘delicate touchdown’

James Bullard

Olivia Michael | CNBC

The Chairman of the Federal Reserve St. Louis James Bullard said on Tuesday that he still thinks the economy can avoid a recession, although he expects the central bank will need to keep raising interest rates to keep inflation under control.

“I think inflation has turned hotter than I expected in the second quarter,” the central bank official said in a speech in New York. “Now that that’s happened, I think we’re going to have to go a little higher than I said before.”

Bullard estimates that the lending rate, which is the central bank standard, will likely have to rise to 3.75%-4% by the end of 2022. It currently stands at 2.25%-2.5 % after four rate hikes this year. The rate sets how much banks charge each other for overnight loans but applies to many adjustable-rate consumer debt instruments.

Still, Bullard said the Fed’s credibility in its dedication to fighting inflation would help it avoid crashing the economy.

Bullard compared the Fed’s current situation to the problems central banks faced in the 1970s and early 1980s. Inflation is now at its highest level since 1981.

He expressed confidence that the Fed today will not have to drag the economy into a recession the way then-President Paul Volcker did in the early 1980s.

“Modern central banks are more reputable than their counterparts in the 1970s,” Bullard said in a speech in New York. “Because of this… the Fed and [European Central Bank] can disinfect in an orderly manner and land relatively soft. “

The markets have been betting the opposite lately, namely that the Fed will raise interest rates so much that an economy that has experienced consecutive quarters of negative GDP growth will slip into recession. Government bond yields are falling and the spread between those yields is narrowing, generally a sign that investors are taking a dim view of future growth.

In fact, futures pricing suggests the Fed will have to pursue rate hikes this year with a cut as soon as the summer of 2023.

But Bullard argues that the Fed’s ability to steer the economy toward a soft landing depends largely on its credibility, namely whether financial markets and the public believe the Fed has the will to stop inflation. broadcast or not. He distinguishes that from the 1970s period when the Fed issued rate hikes in the face of inflation but quickly backed off.

“That credibility didn’t exist in the earlier era,” he said. “We have more credibility than we’ve ever had.”

Bullard will appear Wednesday on CNBC’s “Squawk Box” starting at 7:30 a.m. ET.

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