St. Louis Fed President James Bullard favors continued rate hikes to combat persistent inflation, arguing that fears of a U.S. recession are overblown. U.S. stocks retreated from their highs and turned negative.
On Tuesday, St. Louis Fed President James Bullard said in a media interview that he supports continuing to raise interest rates to combat persistent inflation, and he believes that concerns about a U.S. recession are exaggerated.
The minutes of the Federal Reserve's March meeting showed that amid the banking crisis, many officials lowered their expectations for the peak interest rate and expected the economy to decline mildly this year. Many officials stressed the need to keep policies flexible, and several considered suspending interest rate hikes in March.
However, Bullard disagreed with the judgment of a mild recession. He said, "The labor market appears to be very, very strong. Given that the hot job market will support strong consumption, it does not seem to be the time to predict a recession in the second half of 2023."
He also noted that "there is a strong consensus on Wall Street that there will be a recession in six months or so, but that is not really the way to interpret this economic expansion."
The Fed raised interest rates by 25 basis points as expected at its March meeting, bringing the benchmark federal funds rate to a target range of 4.75%-5%, the highest level since September 2007, just before the financial crisis. The resolution statement deleted the phrase "continued rate hikes are appropriate" and replaced it with "some additional policy tightening may be appropriate", which was interpreted as a dovish tone. The "dot plot" still maintains the interest rate forecast for the end of this year at 5.1%, which means that there may only be one more moderate rate hike.
Bullard’s latest support for raising rates to a range of 5.5% to 5.75% is about 50 basis points above the median forecast. That’s consistent with his views in late March, when he said he raised his forecast for peak rates this year to 5.625% from 5.375% given continued strength in the U.S. economy. That forecast was based on the assumption that stress in the banking sector would ease.
Bullard does not have a vote at the FOMC meetings this year.
After Brad's speech, the market reacted significantly, with U.S. stocks' early gains narrowing rapidly and Russell small-cap stocks turning to decline.
Most Fed officials who have spoken in recent weeks have stressed the need to do more to return inflation to their 2% target amid signs that it is persisting and as banking turmoil in March has abated.