Fed’s Bullard Skeptical on recession probabilities

St. Louis Fed President James Bullard explained, on Wednesday, that inflation at levels last seen in the 1970s and early 1980s is putting the US central bank’s credibility at risk and has been reiterating his call for the Fed to follow through on promised rate hikes to bring down inflation, and inflation expectations.

Fed policymakers next meet June 14-15, and the markets have been trying to second guess the central banks next move and the move after that. The sentiment is fickle and the US dollar has been subsequently pushed and pulled in the last week or so along with US yields. Markets have been concerned that the US is headed to a recession, but Bullard says he is sceptical about recession probabilities, which is likely plus for the greenback, vs the likes of the euro.

Today, the US dollar is higher, lifted by higher Treasury yields as global inflation worries flared anew. The dollar index (DXY), which measures the currency against six major peers, is rising by 0.8% % to 102.59 at the time of print, extending Tuesday’s gains.

“The current US macroeconomic situation is straining the Fed’s credibility with respect to its inflation target,” Bullard said in slides prepared for a presentation to the Economic Club of Memphis.

“Inflation is at more than three times the Fed’s 2% target, pushed up by the collision of strong consumer demand and constrained supply of labor and parts”, said Bullard, adding that ”in response, the Fed has raised interest rates by three-quarters of a percentage point this year – a pace critics say is far too timid to bring inflation under control quickly.

But on Wednesday Bullard laid out the case – as he has many times previously – that the Fed has actually tightened monetary policy far more than its actual rate hikes suggest.”

“The Fed still has to follow through to ratify the forward guidance previously given, but the effects on the economy and on inflation are already taking hold,” Bullard said.

The US central bank’s reduction of its massive balance sheet – a process known as “quantitative tightening” – has already been “partially successful” in pushing up longer-term borrowing costs, he said.

“We’ll have to see how this plays out in the months ahead,” Bullard added in a virtual appearance before the Economic Club of Memphis. The Fed began trimming its balance sheet this month.

Key Quotes

Current US macro situation ‘straining’ Fed’s credibility on inflation.
Inflation expectations could become unmoored without credible fed action.
Fed has taken important steps to return inflation to 2%, including rate hikes and promises of more.
Fed must follow through on forward guidance with rate hikes.
Effects of Fed’s forward guidance on rates already taking hold on economy, inflation.
Labor markets robust, expect continued GDP growth in 2022, risks remain substantial.

Not advisable to move too quickly in central banking.
Have already announced we’ll raise rates by 50 bps per meeting, that’s a good path.
Want to get to higher policy rate expeditiously.
If unable to bring inflation under control, could be in for a very long haul.
Hopeful to bring inflation down to 2% ‘very soon’.
Have hope that special factors driving inflation will abate.
If pandemic had ended cleanly in 2021 Fed would have acted more quickly.
I don’t think the signals for the need to raise rates were really there until the fall of 2021.
hopefully will be able to bring inflation down in quarters, years ahead.
If war remains contained as it is today, i don’t see it as a direct drag on US economy.
QT has been partially successful so far in pushing up on long-term rates.