VOT Research Desk
Market Analytics and Considerations
James Bullard, president of the St. Louis Federal Reserve, stated that even under a “compassionate” assessment of fiscal policy, the Federal Reserve needs to continue increasing interest rates—probably by at least a further whole percentage point. He claimed that rate increases thus far “have now had only minimal effect on measured inflation.
The current target policy rate, which is between 3.75% and 4%, is below the “sufficiently restrictive” level, according to Bullard, that the Fed believes is required to bring inflation down to its 2% target. This is true even though the Fed has taken robust action this year, he added.
Bullard illustrated in a graphic for debate at a Louisville economic event that even under “dovish” parameters, rates should climb to at least near 5%, while under tougher presumptions, rates should be near 7%.
Bullard noted that “market expectations are for dropping inflation in 2023,” but added that “that entire range might fall” if inflation drops below estimates faster than anticipated.
But he said that “prudence is required” since “dwindling inflation is around the bend,” as foreseen by investors and Fed officials for the previous 18 months.
As of September, a key Fed indicator of “nucleus” inflation that was employed in Bullard’s research was operating at 5.1%, which is double the Fed’s objective. As a result, Fed policymakers are united in support of more rate increases even as they debate the speed and endpoint of their policy raising cycle.
Even with the optimistic estimates, this analysis reveals that the policy rate has not yet gotten to a point where it can be justified as being sufficiently restrictive. Bullard acknowledged this. “The policy rate will need to be raised even more in order to reach a level that is suitably restrictive.
He left out of his prepared speech his recommended course of action for the forthcoming December meeting of the Fed, where members are anticipated to increase interest rates by half a point.
Bullard’s suggested lower bound for a “constrictive” stance of policy is consistent with recent remarks made by his counterparts as well as the capital institutions’ current estimation of a maximum federal funds rate of around 5% in the upcoming year.
