Olivia Michael | CNBC
St. Louis Federal Reserve President James Bullard said on Tuesday he still believes the economy can avoid a recession, although he expects the central bank will need to raise interest rates further to control inflation.
“I think inflation was hotter than I expected in the second quarter,” a 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 I said before.
The Fed Funds rate, which is the central bank’s benchmark, will remain unchanged until 2022. will likely have to rise to 3.75-4% by the end of the year, Bullard estimates. It currently stands at 2.25-2.5% after four rate hikes this year. Interest rates set the level that banks charge each other for overnight loans, but pass on to many regulated interest consumer debt instruments.
Nevertheless, Bullard said the Fed’s confidence in its commitment to fighting inflation will help prevent the economy from collapsing.
Bullard compared the Fed’s current situation to the problems central banks faced in the 1970s and early 1980s. Inflation is currently the highest since 1981.
He expressed confidence that the Fed would not have to push the economy into recession today, as then-Chairman Paul Volcker did in the early 1980s.
“Today’s central banks have more credibility than their counterparts in the 1970s,” Bullard said during a speech in New York. “As a result… the Fed and [European Central Bank] may be able to inflate neatly and achieve a relatively soft landing.
Markets have recently been betting the opposite, that the hawkish Fed will raise interest rates so much that an economy that has already experienced consecutive quarters of negative GDP growth will enter a recession. Government bond yields have been falling, and the spread between those yields has been narrowing, which typically indicates that investors are taking a dim view of future growth.
In fact, futures pricing suggests that the Fed will have to follow through on its rate hikes this year and will cut rates in 2023. in the summer
But Bullard argued that the Fed’s ability to steer the economy toward a soft landing depends largely on its credibility, particularly whether financial markets and the public believe the Fed has the will to stop inflation. He distinguished it from the 1970s era, when the Fed raised interest rates in the face of inflation but quickly backed off.
“There was no such reliability in the old days,” he said. “We have a lot more credibility than we had before.”
Bullard will appear Wednesday on CNBC’s “Squawk Box” at 7:30 ET.