A senior Fed official reiterated his support for raising interest rates further as an “insurance” policy against inflation, underscoring the central bank’s divergence in monetary policy.
St. Louis Fed President James Bullard, one of the central bank’s top hawks, said on Thursday he would keep an “open mind” about the next policy meeting in June, but said he was inclined to support another rate hike of his own accord. It has risen 10 times in a row since last year.
Another 25 basis point increase would bring the benchmark federal funds rate to a new target range of 5.25-5.50 percent, higher than what most officials thought was necessary in March to keep inflation in check, in line with Fed Chairman Jay Powell and other policymakers pausing hikes. Interest inconsistencies have recently made recommendations at a time of uncertainty.
Bullard said in an interview with the FT: “I do expect there to be deflation, but it’s slower than I’d like it to be, and that might require some insurance by raising interest rates to make sure we do Keep inflation under control.” .
“Our main risk is that inflation doesn’t come down like it did in the 1970s, or even go back higher,” he said.
Bullard’s comments dovetailed nicely with those of Dallas Fed President Lorie Logan, a voting member of this year’s Federal Open Market Committee, who said earlier Thursday that a June rate hike was on hold. The reasons are not convincing.
That contrasted sharply with comments this week from several officials urging a more cautious approach, as well as from Fed Governor Philip Jefferson, whom the Biden administration has just appointed as its next vice chairman. Jefferson emphasized that he expects economic growth to slow this year and that interest rates will be fully priced into the economy.
“History has shown that the time lag in monetary policy is long and variable and that a year is not long enough for demand to feel the full impact of higher interest rates,” Jefferson said on Thursday, citing the potential for near-term stress on the banking sector. dragged down as lenders retrench.
Bullard said concerns about the impact of stress on the banking sector were “overemphasized” and that the bigger impact on the economy is likely to be the recent decline in Treasury yields.
“We’re trying to withstand this disinflationary pressure, and that should come through higher interest rates,” he said, calling yields “going in the wrong direction” “a bit of a concern.” “Maybe that will push the rate of deflation a little bit higher than we would expect,” he added.
Bullard reiterated that the current benchmark rate is at the low end of a range considered “sufficiently restrictive” — meaning enough pressure on the economy to ease price pressures. A policy rate of just above 6 percent represents the upper end of the range, according to his calculations.
“It’s probably better and more prudent to be in the middle of the region,” he said, noting that the labor market was also “not just strong, but very strong.” Richmond Fed President Tom Barkin told the Financial Times on Tuesday that the labor market had shifted from “hot” to “hot” at best.
Asked about the deadlock in Congress over raising the federal debt ceiling, the head of the St. Louis Fed likened a potential default to “shooting itself in the foot” because it could send U.S. borrowing costs soaring.