Olivia Michael | CNBC
St. Louis Federal Reserve Chairman James Bullard said on Tuesday he still believes the economy can avoid a recession, even though he expects the central bank to keep raising rates. to control inflation.
“I think inflation is stronger than I expected in the second quarter,” the central bank official said during a speech in New York. “Now that it’s happened, I think we’re going to have to go a little higher than what I said before.”
The federal funds rate, which is the central bank’s benchmark, will likely need to rise to 3.75%-4% by the end of 2022, Bullard estimated. It is currently between 2.25% and 2.5% after four rate hikes this year. The rate sets the level that banks charge each other for overnight lending, but trickles down to many consumer variable-rate debt instruments.
Nonetheless, Bullard said the Fed’s credibility in its commitment to fighting inflation will help it avoid dragging down the economy.
Bullard compared the Fed’s current situation to the problems faced by central banks in the 1970s and early 1980s. Inflation is now at its highest level since 1981.
He said he’s confident the Fed today won’t have to drag the economy into a recession like then-President Paul Volcker did in the early 1980s.
“Modern central banks have more credibility than their 1970s counterparts,” Bullard said during a speech in New York. “Because of this… the Fed and the [European Central Bank] may be able to deflate in an orderly fashion and achieve a relatively soft landing.”
Markets have recently made the opposite bet that a hawkish Fed will raise rates so much that an economy that has already endured consecutive quarters of negative GDP growth will slide into recession. Government bond yields have fallen and the spread between those yields has narrowed, a general sign that investors view future growth with a dim view.
In fact, futures prices indicate that the Fed will have to follow up its rate hikes this year with cuts as early as the summer of 2023.
But Bullard argued that the Fed’s ability to steer the economy toward a soft landing rests largely on its credibility, particularly if financial markets and the public believe the Fed has the will to stop the crisis. inflation. He differentiated this from the 1970s era, when the Fed decreed rate hikes in the face of inflation, but quickly backed off.
“That credibility didn’t exist at the time,” he said. “We have a lot more credibility than before.”
Bullard will appear on CNBC’s “Squawk Box” Wednesday beginning at 7:30 a.m. ET.