Bullard rules out talk of recession and is in favor of more rate hikes

The US central bank should continue to raise interest rates in light of recent data showing inflation remains persistent, while the overall economy appears poised to continue growing, albeit slowly, the Fed chairman said. Federal of Saint Louis, James Bullard.

In an interview with Reuters, bullard responded to views that the United States is headed for a banking crisis, recession, or both in the near future: “Wall Street is very invested in the idea that there’s going to be a recession in six months or something, but that’s not really the way an expansion like this would read.”.

Investors may see rate cuts in the near future, part of a recession-based worldview, but “the job market looks very, very strong. And the conventional wisdom is that if you have a strong job market that fuels strong consumption… and that’s a big part of the economy… it doesn’t seem like the time to be predicting that you’re going to have a recession in the second half of 2023.“, said.

Despite the current 3.5% unemployment rate, Fed staff at the March 21-22 policy meeting said they also anticipate a “mild recession” this year, while colleagues from bullard They have drawn an economic outlook that points to zero growth or contraction for much of the rest of the year after a relatively strong first quarter.

In the case of personnel forecasts, the consequences of the recent tensions in the banking sector seem to tip the balance.

But if the failure of two US banks last month were to trigger a crisis, he said bullard, would likely be reflected in data such as the St. Louis Federal Reserve’s Financial Stress Index. The index spiked after the Silicon Valley Bank failed on March 10, but quickly returned to a normal reading.

“If there really were to be a major financial crisis, the index would go up to four or five points. Now it is at zero. So it doesn’t seem, right now, like much is happening.“, said bullard.

Higher terminal rate

The comments of bullard are on the aggressive side of an ongoing debate at the Fed about how to gauge the latest steps in a historically fast rate hike cycle against evidence that core inflation is not falling very fast toward the 2% target, and signs that the economy is slowing under the rising cost of credit approved so far.

Measures such as the trimmed average inflation rate of the fed Dallas have been flat for several months, indicating – depending on your view – that core inflation remains more than double the Fed’s target and needs to be tamed, or that the delayed impact of monetary policy is yet to come. has not been felt.

In March, most of the authorities in the fed considered that one more increase was enough, which would raise the reference interest rate to a day to a range between 5.00% and 5.25%. It could happen at the Federal Reserve meeting on May 2-3.

Although he agrees that the hardening cycle may be near the end, bullard believes that the interest rate will have to rise another half percentage point above that level, until it is between 5.50% and 5.75%.

Some policymakers and analysts worry that these latest steps could push the economy into recession.

And beyond the decision to raise rates next month, the fed will have to send some signal about what happens next, either by keeping the language of the current monetary policy statement, according to which “additional hardening may be appropriate”, or pointing to a pause.

Source: Reuters