Fed’s Bullard: Rate hike this week was “a good next step”

St. Louis Federal Reserve President James Bullard, at a conference held by the Economic Club of Minnesota, supported the 25 basis point rate hike that the Fed took this week, calling it “a good next step.”

Bullard also noted that there is a significant amount of inflation in the economy. In terms of the economic outlook, Bullard’s base case is not a recession, but rather slow growth and declining inflation. Bullard added that the labour market remains “very tight” and will take time to cool.

“Now the committee feels we are in the territory of sufficiently restrictive,” said Bullard, who served as a voting member on the Fed’s rate-setting committee last year, but rotated out in 2023.

His response was to a question on markets’ expectation for a rate cut this year due to a potential recession. Bullard believes Wall Street is betting too “heavily on a recession scenario.”

“Recessions are caused by shocks and those shocks aren’t predictable,” said Bullard, adding that while the banking stresses could multiply, he wouldn’t put it as his base case. Investors now place a 52% bet on a 25-basis-point cut starting the FOMC meeting in September.