The Federal Reserve has been taking an aggressive approach to fighting inflation, with policymakers increasing rates by a quarter percentage point at their most recent meeting on Jan. 31-Feb. This followed a half-point increase in December, and four consecutive 75-basis-point hikes last year. However, St. Louis Fed President James Bullard said the US economy may be more resilient than financial markets had originally thought six to eight weeks ago, and he expects moderately slow growth with inflation declining.
Bullard told CNBC's Squawk Box that a more aggressive interest rate hike now would give the rate-setting Federal Open Market Committee a better chance to bring down inflation that, while falling some off the precarious levels of 2022, is still high. He expects short-term interest rates to peak between 5.25%-5.50%, still over half a percent above their current level.
Cleveland Fed President Loretta Mester also said Thursday she saw a “compelling economic case” for a 50 basis-point interest-rate hike at the Fed’s Jan. 31-Feb. 1 meeting, and said policymakers need to be open to bigger rate hikes going forward if economic conditions warrant.
Bullard said he was encouraged by signs of disinflation in the quarterly update from retail giant Walmart, which noted that customers were increasingly turning to lower-price alternatives to their usual goods. He said consumers trading down and benefiting from lower prices is a disinflationary process.
John Williams, President of the Federal Reserve Bank of New York, said it’s critical the US central bank remain committed to its 2% inflation goal, and emphasized monetary policy must bring supply and demand into better balance to lower inflation. He said strong demand in the US economy continues to exceed supply, pointing to persistent price pressures in the services sector, excluding food, energy and shelter.
It’s clear that the Federal Reserve is taking an aggressive stance in fighting inflation. While the economy may be more resilient than markets previously thought, officials must remain committed to their 2% inflation goal and be prepared to raise rates higher if conditions warrant.
0. “President of St. Louis Fed pushes for steeper rate hike amid fears of 1970s-style inflation spiral” Fox Business, 22 Feb. 2023, https://www.foxbusiness.com/economy/president-st-louis-fed-james-bullard-pushes-steeper-rate-hike-fears-1970s-style-inflation-spiral
1. “Bullard Discusses Disinflation, Rate Increases and Economic Resilience on CNBC” Federal Reserve Bank of St. Louis, 22 Feb. 2023, https://www.stlouisfed.org/from-the-president/video-appearances/2023/bullard-disinflation-rate-increases-economic-resilience-cnbc
2. “Fed's Bullard: ‘Sharp' tightening of policy still needed to tame inflation By Investing.com” Investing.com, 22 Feb. 2023, https://www.investing.com/news/economy/feds-bullard-sharp-tightening-of-policy-still-needed-to-tame-inflation-3010665
3. “Fed's Mester Says She Saw ‘Compelling' Case for Half-Point Rate Hike” Bloomberg, 16 Feb. 2023, https://www.bloomberg.com/news/articles/2023-02-16/fed-s-mester-says-she-saw-compelling-case-for-half-point-hike
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