EXCLUSIVE Fed’s Bullard favors ‘frontloading’ rate hikes now, with wait-and-see stance in 2023

WASHINGTON, Oct 14 (Reuters) – A “hotter-than-expected” September inflation report doesn’t necessarily mean the Federal Reserve needs to raise interest rates more than officials at their recent policy meeting, St. Louis Fed President James Bullard, said said on Friday, although it warrants continued frontloading by larger hikes of three-quarters of a percentage point.

In an interview with Reuters, Bullard said that US September CPI data, released on Thursday, showed that inflation was “harmful” and difficult to contain, so “it makes sense that we’re still moving fast move”.

After announcing a fourth straight 75 basis point hike at his policy meeting next month, Bullard said: “If it were today, I’d make a hike of the same magnitude in December, although he added that it’s “too early “Let’s prejudge” what to do at this last meeting of the year.

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If the Fed does two more hikes of 75 basis points this year, its interest rate would end in a range of 4.50% to 4.75% in 2022.

In dovish remarks for one of the Fed’s most dovish voices of late, Bullard said he would base any further hikes on incoming data at this point.

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“I think 2023 should be a data dependent year. It’s a two-way risk. It’s very possible that the data will come in a way that will force the (Federal Open Market) Committee to raise interest rates. But it’s also possible that you’re starting some good disinflationary momentum, and in that situation the committee could keep the policy rate on hold and keep it stable,” Bullard said a day after the U.S. government reported that consumer price inflation was rising had stayed above 8% last month.

The possibility of a fifth raise in December, which is bigger than usual, is “a little bit more leverage than what I’ve said in the past,” he added.

But Bullard’s course would still leave the target rate at the median level that Fed officials should have forecast last month – evidence of broad consensus at the central bank for at least a temporary breakpoint after a year of steadily raising interest rate expectations to have.

Although some of Bullard’s colleagues want to reach that point in smaller increments and not until early next year, Bullard believes a faster hike is warranted because the US job market remains strong and “there’s just not a lot of evidence that we’re getting the disinflation.” that we’re looking for.”

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Although some investors and economists expect the Fed will have to hike rates further to 5% or higher, Bullard said, “I wouldn’t predict that now… If that happens, it’s because inflation doesn’t happen in the first half of 2023.” , we hope, and we continue to get hot inflation reports.

The level he has set for the year-end is enough, he says, to bring the Fed’s closely-watched personal spending inflation index below 3% next year, a long way back from the central bank’s 2% target.

‘SOFT LANDING’

Bullard said that despite the turmoil in financial markets, “there is still significant potential for a soft landing” as the United States is likely to avoid a recession and companies have been reluctant to lay off workers who have been difficult to hire during the economic period Reopening after the pandemic.

Warnings of a recession risk could be partially skewed by inflation itself, Bullard said, with short-term bond yields being pushed higher than longer-term ones not from a lack of confidence in the economy, a yield curve “inversion” that prompts investors to bet on a recession, but because of the premium being charged for the inflation that is now taking place.

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Market volatility is to be expected as interest rates rise, he said, but may calm down after a period of adjustment.

“It’s the transition that throws everyone for a loop,” Bullard said. But after that, the economy “could grow just as fast with the higher interest rates,” he said.

Asked about feelings that events overseas, such as tensions between the Bank of England and the current UK government, could risk major financial problems, Bullard said his regional bank’s Financial Stress Index shows him as low.

Compared to the severe market downturns during the 2008 financial crisis or the onset of the COVID-19 pandemic in early 2020, “I don’t think we’re in a situation where global markets are facing a lot of stress like this guy.”

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Reporting by Howard Schneider; Adaptation by Dan Burns and Paul Simao

Our standards: The Thomson Reuters Trust Principles.

Howard Schneider

Thomson Reuters

Covers the Federal Reserve, Monetary Policy and Economics, University of Maryland and Johns Hopkins University graduate with previous experience as a foreign correspondent, economic reporter and local contributor to the Washington Post.

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