Inflation won’t come down without more aggressive Federal Reserve policies and the U.S. is vulnerable to unforeseen shocks that could send prices higher still, a top Fed official has warned.
James Bullard, president of the St Louis branch of the Fed, said the central bank needs to be more aggressive rate hikes to curb the highest inflation in 40 years. He is calling for rates to rise to a point where they actively curtail growth, Financial Times reported.
At its March 15-16 meeting, the Fed approved its first interest rate hike in more than three years. The quarter-point hike moved the federal funds rate to a level that now ranges between 0.25-to-0.5 percent. Up to seven rate hikes in 2022 are possible, the Fed suggested.
A voting member of the policy-setting Federal Open Market Committee, Bullard is an inflation hawk — a policymaker who is seen as willing to allow interest rates to rise to keep inflation under control. His comments are counter to other officials who want to push rates closer to a “neutral” level this year.
At a neutral level estimated to be around 2.4 percent, rates neither restrict nor promote economic activity. Bullard said the central bank needs to get beyond that threshold as soon as possible if it wants to bring inflation closer to the Fed’s longstanding 2 percent target.
“There’s a bit of a fantasy, I think, in current policy in central banks,” Bullard said in an interview with the Financial Times. “Neutral is not putting downward pressure on inflation. It’s just ceasing to put upward pressure on inflation. We have to put downward pressure on the component of inflation that we think is persistent. Getting to neutral isn’t going to be enough, it doesn’t look like, because while some of the inflation may moderate naturally . . . there will be a component of it which won’t.”
Consumer prices rose 8.5 percent in March 2022 compared to a year ago, the highest rate of increase since 1981, according to the Labor Department’s consumer price index (CPI) report released April 12.
Federal Reserve Chairman Jerome Powell, who repeatedly downplayed the risk of inflation earlier in 2021, finally said in November 2021 that he was retiring the word “transitory” to describe the inflationary outlook and that he believed that the omicron variant could threaten the U.S. economy.
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Charles Evans, the president and CEO of the Federal Reserve Bank of Chicago, suggested the Fed will move to rein in inflation more aggressively at its next meeting in May. A 0.5 percent interest rate increase is “perhaps highly likely,” Evans said at a Detroit Economic Club meeting Monday April 11.