James Bullard, the president of the Federal Reserve Bank of St. Louis, has been a strong proponent, or maybe it's more predictor, of the need for higher interest rates. A new interview with Reuters shows that he's still for further benchmark rate hikes, even more so than some others at the Fed. And yet he also doesn't expect either a recession of a banking crisis in the immediate future.
Bullard has been on record as saying the benchmark federal funds rate would need to top 5% and perhaps reach as high as 7%. In this most recent interview, he stepped back from the high end but still sees a greater total hike than many others at the Fed.
"The bulk of Fed policymakers as of March felt one more rate increase, which would raise the benchmark overnight interest rate to a range between 5.00% and 5.25%, was all that would be needed. That could come at the Fed's May 2-3 meeting," the Reuters report said. "While agreeing that the tightening cycle may be close to the finish line, Bullard feels the policy rate will need to rise another half of a percentage point beyond that level, to between 5.50% and 5.75%."
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That would represent another 0.75 percentage points of increase, or three more hikes at the 25-basis point pace that the Fed has been most recently using.
The number and size of additional increases have been controversial. Experts and industry figures are concerned that if interest rates grew too high, it would adversely affect the economy and potentially drive it into a recession. Part of the complications in views has been the ongoing strength of the economy and also increases in the labor force size and wages. Fed Chair Jerome Powell and others have made it clear that they collectively expect a slowing of the labor market based on historic precedent. However, the speed of job creation compared to the size of the labor force has been unprecedented for since at least 2000. It might be that underlying dynamics have changed significantly.
"In comments countering views that the U.S. is heading towards a banking crisis, a recession, or both in the near future, Bullard told Reuters: 'Wall Street's very engaged in the idea there's going to be a recession in six months or something, but that isn't really the way you would read an expansion like this.'" He doesn't think a big increase in unemployment is necessary. Rather, he sees the need for people and businesses to spend through savings from the pandemic and economic stimulus programs. Less money means less price competition and slowing inflation.
However, he's also of the view that the fewer promises anyone makes, the better, because there is still too much uncertainty.
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