St. Louis Fed President James Bullard said that even with the “most dovish” analysis of monetary policy, the Fed would need to keep raising rates, possibly by at least another 1 percentage point. He sees the rate hikes so far as having “limited effects relative to the observed inflation.”
Bullard said that while the Fed has taken aggressive action this year, the current target policy rate of 3.75% to 4% is still below the “sufficiently restrictive” level the Fed believes is needed to bring inflation down to its 2% goal.
Bullard told an economic event in Louisville that even with the “dovish” assumption, the basic monetary policy rules would call for rates to rise to at least around 5%, while a stricter assumption would suggest rates above 7%.
If inflation falls faster than expected, the entire range might fall, Bullard said, noting that “the market is pricing in lower inflation in 2023.”
However, “caution is warranted”. Because investors and Fed officials “have been predicting for the past 18 months that a decline in inflation is coming,” he said.
The Fed’s closely watched core PCE inflation reading was 5.1% as of September, double the Fed’s target, making Fed officials unanimous in favor of further rate hikes even as they discuss the magnitude of the tightening cycle and eventual rates.
“While the policy rate has risen sharply this year, according to the analysis, even under the most optimistic assumptions, it has not yet reached a level that might prove restrictive enough,” Bullard said. “In order to be restrictive, the policy rate will Further improvement is needed.”
In his written remarks, he did not mention the likely outcome at the upcoming December meeting, where the Fed is widely expected to raise interest rates by half a percentage point.
Bullard’s suggested lower end of the “restrictive” level of policy is in line with recent comments by his colleagues and with financial markets currently pricing in a peak federal funds rate of around 5% next year.
