Fed’s Bullard Says Rates as High as 7 Percent May Be Necessary to Reduce Inflation

James Bullard, president of the Federal Reserve Bank of St. Louis, during the European Banking Congress in Frankfurt, Germany, on Nov. 18, 2016. (Daniel Roland/AFP via Getty Images)

The Federal Reserve may have to raise rates as high as 7 percent in order to have an impact on inflation, said James Bullard, president of the Federal Reserve Bank of St. Louis.

Even if one allows for a “generous” assessment regarding the recent progress the Fed has made to fight inflation, it must continue to stay on course with its hawkish interest rate policy, stated James Bullard on Nov. 17.

While making his “Getting into the Zone” (PDF) presentation at an event in Louisville, Kentucky, the St. Louis Fed president stated that the Fed’s monetary tightening stance has so far “had only limited effects on observed inflation, but market pricing suggests disinflation is expected in 2023.”

As a voting member on the rate-setting Federal Open Market Committee (FOMC), Bullard has been one of the hawkish voices on interest rate policy.

Bullard made his remarks based a rule set by Stanford economics professor John Taylor, which establishes a link between where the federal funds rate should be in comparison with inflation and economic growth.

Defining the Taylor Rule

According to the standards set by the so-called “Taylor Rule,” Bullard believes that the Fed’s efforts to combat inflation are so far insufficient.

He believes that the central bank would to have to at least raise its target range to 5.00–5.25 percent, from the current level of 3.75 percent, in order to curb rising prices.

Bullard noted said some of the worst inflation assessments may even recommend a target policy rate above 7 percent.

On the other hand, the entire range of policies could be cut if prices tumbled more rapidly than expected, since “market expectations are for declining inflation in 2023.”

That best-case scenario would allow the U.S. economy to sidestep a serious recession, relieving pressure on households, states, and businesses, and giving the economy enough space to grow with declining inflation.

However, he said that it was up to Fed Chairman Jerome Powell to make the call on how high or fast the FOMC should move rates at its upcoming meetings.

“On the question of how much to do at any particular meeting ... I would leave that up to the Chair,” said Bullard.

“If you do more now, you have less to do in the first quarter [of 2023]. If you do less now, then you have more to do in the first quarter. Generally speaking, it probably does not make a lot of difference in terms of the macroeconomics.”

The Fed Stays the Course

The Fed has consecutively increased borrowing rates by 75 basis points since June, but is expected to reduce its next rate hike to 50 basis points at its next meeting on Dec. 13–14.

Bullard said that although inflation rates were slightly declining recently, it was clear that interest rates would need to be further increased.

The October annual inflation rate of 7.7 percent remains too high, even after hitting a 40-year high record of 9.1 percent in June, Buller explained.

He dismissed last month’s decline in the annual pace of consumer inflation as merely a “tentative” sign that a disinflationary trend was taking place and that future data “could easily go the other way in the next report.”

Bullard explained that the Fed had been repeatedly “burned” by two years of bad analysis, while inflation remains well above its target of 2 percent.

His remarks have been backed by other Fed officials, with most still supporting the need to raise interest rates to slow inflation, while others were more open to lessening the pace of rate increases next year.

One of those concerned about the hawkish policy was Esther George, president of the Federal Reserve Bank of Kansas City, who had observed the impact that the current strategy had on the economy, but remained a strong supporter of continued rate increases, according to The Wall Street Journal.

“I have not in my 40 years with the Fed seen a time of this kind of tightening that you didn’t get some painful outcomes,” said George, explaining that an economic contraction was to be expected.

Meanwhile, Federal Reserve Board Governor Christopher Waller told CNBC that he would only change course if he were persuaded by strong evidence that inflation had hit its peak, while Mary Daly, president of the Federal Reserve Bank of San Francisco, declared that a “pause is off the table,” in a separate interview with the same network.

Reuters contributed to this report.