Bullard sets tone with Fed officials signaling hikes will continue

(Bloomberg) – St. Louis Fed President James Bullard said policymakers should raise interest rates by at least 5% to 5.25%, hitting financial markets as investors recalibrate the bets on how senior officials would go.

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“In the past, I’ve said 4.75% to 5%,” he told reporters Thursday after giving a speech in Louisville, Kentucky. “Based on this analysis today, I would say 5% to 5.25%. It is a minimum level. According to this analysis, that would at least put us in the zone.

Chairman Jerome Powell said earlier this month that rates will have to rise more than expected due to disappointing inflation data, while suggesting officials could moderate the scale of their increases going forward. A key reading on consumer prices since then has been better than expected, but policymakers continue to stress the need to keep raising rates.

In September, officials had forecast rates to rise to around 4.6% next year, from a current target range of 3.75% to 4%. These projections will be updated at the Fed’s December 13-14 meeting.

Yields on the 10-year US Treasury rose after Bullard became the latest official to say interest rates needed to rise further to curb the highest inflation in 40 years.

San Francisco Fed President Mary Daly said Wednesday that “somewhere between 4.75 and 5.25 seems a reasonable place to consider” for the level at which officials should raise rates and then suspend them.

Bullard’s hawkish tone was echoed later Thursday by Minneapolis Fed Chairman Neel Kashkari, who said it was an “open question” how far the central bank should go with rates to bring demand back into balance.

“I need to be confident that inflation has at least stopped rising, that we’re not falling further behind the curve before advocating for a halt to further advancement of future rate hikes, so we’re not there yet. “, he told the House of Minnesota. of Commerce’s 2022 Economic Summit.

“The Fed is still maintaining an outward appearance of hawkishness as we await another month of inflation data,” said Guy LeBas, chief fixed income strategist for Janney Montgomery Scott LLC in Philadelphia. “A month of falling inflation does not mean the war is over.”

Last week’s data showed consumer inflation rose 7.7% less than expected in the 12 months to October. The November reading will be released on December 13, before officials begin their two days of policy deliberations.

During his presentation, Bullard showed charts indicating that rates will need to be between around 5% and 7% to achieve policymakers’ goal of being “tightly enough” to curb inflation near a peak. four decades.

The calculation used different versions of a Taylor Rule, a popular monetary policy guideline developed by John Taylor of Stanford University.

“Minimum” level

“It’s easy to argue that before this is all over you should move to much higher levels of the policy rate” than 5.25%, said Bullard, who is voting on the policy this year. “But for now, I would be happy to reach the minimum level and that’s why I think the committee is going to have to do more.”

The St. Louis Fed chief, who has been among the most hawkish policymakers this year, was the latest central banker to call for additional action.

The Fed raised rates by 75 basis points on Nov. 2 for the fourth straight time in its most aggressive tightening since the 1980s to rein in inflation that began in the wake of disruptions from the Covid-19 pandemic. 19.

Bullard did not say whether he would favor a 50 or 75 basis point move at the Fed’s December meeting, telling reporters he would look to Powell to set the direction.

A number of his colleagues have called for a downward revision to the size of the next rate hike after last week’s consumer price report showed a slowdown in underlying inflation. consumer goods in October.

Investors expect the Fed to hike rates by half a percentage point next month and for rates to peak at around 5% next year.

The St. Louis Fed chairman said he expects officials to keep rates high for an extended period to avoid the kind of monetary policy mistakes of the 1970s that led to inflation constantly high.

“We definitely don’t want to replay this episode,” he told reporters. “So we’re going to have to see very hard evidence that inflation is falling significantly towards target, and I think we’re going to want to err on the side of staying higher longer for that to happen.”

Bullard said while he expected inflation to fall next year, there has been relatively little evidence of that so far.

“So far, the change in monetary policy stance appears to have had only limited effects on observed inflation, but market prices suggest that disinflation is expected in 2023,” Bullard said in his prepared remarks, adding that the rate hikes so far have caused little financial trouble. stress.

(Updates with Kashkari’s comment in seventh paragraph.)

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