Olivia Michael | CNBC
James Bullard, president of the St. Louis Federal Reserve, said Tuesday he still believes the economy can avoid a recession, even as he expects the central bank to continue raising interest rates to keep inflation in check.
“I think inflation has come in higher than I expected in the second quarter,” the central bank official said during a speech in New York. “Now that that’s done, I think we need to go a little higher than what I said before.”
The Fed Funds rate, the central bank’s benchmark, is likely to need to reach 3.75%-4% by the end of 2022, Bullard estimated. It currently stands at 2.25%-2.5% after four rate hikes this year. The rate determines the level that banks charge each other for overnight lending, but is reflected in many consumer debt instruments with adjustable interest rates.
Nevertheless, Bullard said the credibility of the Fed in its commitment to fight inflation will help prevent the economy from slowing down.
Bullard compared the current situation of the Fed to the problems faced by central banks in the 1970s and early 1980s. Inflation is now at its highest point since 1981.
He expressed confidence that the Fed today will not have to drag the economy into recession as then-chairman Paul Volcker did in the early 1980s.
“Modern central banks have more credibility than their counterparts in the 1970s,” Bullard said during a speech in New York. “Because of this… the Fed and the… [European Central Bank] might be able to inflate in an orderly fashion and achieve a relatively soft landing.”
Markets have recently taken the opposite bet, which is that an aggressive Fed will raise interest rates so much that an economy that has already endured consecutive quarters of negative GDP growth will slide into recession. Treasury yields have fallen and the spread between those yields has narrowed, which is generally a sign that investors have a vague idea of future growth.
Futures pricing even indicates that the Fed will have to follow its rate hikes with cuts as early as the summer of 2023 this year.
But Bullard argued that the Fed’s ability to steer the economy towards a soft landing depends largely on its credibility, specifically whether the financial markets and the public believe the Fed has the will to stop inflation. He distinguished that from the 1970s era, when the Fed introduced rate hikes when faced with inflation, but quickly backed off.
“That credibility didn’t exist before,” he said. “We have a lot more credibility than we used to.”
Bullard appears on CNBC’s “Squawk Box” Wednesday starting at 7:30 a.m. ET.