Fed’s Bullard says rate hikes have had ‘limited effects’ on inflation so far

St. Louis Federal Reserve Chairman James Bullard said Thursday that the central bank still has a lot of work to do before bringing inflation under control.

A voting member of the Federal Open Market Committee responsible for setting rates, Bullard delivered remarks centered on a rules-based approach to policy-making. Using standards set by Stanford economics professor John Taylor, Bullard insisted that the Fed’s actions so far are insufficient.

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“So far, the change in monetary policy stance appears to have had only limited effects on observed inflation, but market prices suggest disinflation is expected in 2023,” he said. he declares.

Even using what he called “generous” assumptions about the progress the Fed has made so far in fighting inflation, he noted in a series of slides that “the policy rate is not not yet in an area that can be considered sufficiently restrictive”.

“To reach a sufficiently restrictive level, the policy rate will have to be increased further,” he added in the presentation.

Recent data indicates that the pace of inflation may slow. October’s consumer price index rose 0.4%, below market expectations, and the annual pace is down to 7.7%, below the 41-year high reached this summer, but still well above the Fed’s 2% target. Another metric Fed officials prefer is core inflation, excluding food and energy, at 5.1% a year, but that’s still not on target.

There is little to no dissent on the Fed as to whether rates should continue to rise. Most members have suggested a few more increases over the next few months that will take the central bank’s benchmark overnight borrowing rate to around 5% from its current target range of 3.75% to 4%. .

However, Bullard’s presentation argued that 5% could serve as a low range to determine where the funds rate should be, and that the upper limit could be closer to 7%. This is well out of step with current market prices, which also see the fed funds rate hit around 5% by mid-2023.

The Taylor Rule, as it is called, relates what the funds rate should be compared to inflation and economic growth. Inflation growth has slowed recently, but the annual rate remains around the highest in over 40 years.

Bullard’s remarks follow statements by several other Fed officials expressing the need to keep pressure on inflation, though several said policymakers could tone down the level of recent increases a bit. The Fed has approved four consecutive rate hikes of 0.75 percentage points, and markets generally expect the December FOMC meeting to produce a 0.5 percentage point hike.

Despite her support for continued rate hikes, Kansas City Fed President Esther George told the Wall Street Journal in a report dated Wednesday that she was concerned about the impact that policy tightening could have on the economy.

“In my 40 years with the Fed, I haven’t seen a moment of this kind of tightening without you getting painful results,” George told the Journal, listing a “contraction” among the potential results. .

George is also an FOMC voter.

In other recent remarks, Fed Governor Christopher Waller said on Wednesday he was open to the idea of ​​”reducing” the level of rate hikes, but added that he will have to see more evidence. before being convinced by recent data suggesting that inflation has plateaued.

Additionally, San Francisco Fed President Mary Daly told CNBC on Wednesday that she expects further rate increases and that a “pause is not on the cards,” even with a level of weakness. lower rate increase.

Another group of Fed speakers are listening Thursday, including several regional presidents and Governor Michelle Bowman.

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