St. Louis Federal Reserve bank president, James Bullard calls it a “fantasy” to believe that the central bank can raise rates enough to cool inflation without constraining the economy. Colby Smith reports for the Financial Times:
A top Federal Reserve official has warned it is a “fantasy” to think the US central bank can bring inflation down sufficiently without raising interest rates to a level where they constrain the economy.
James Bullard, president of the St Louis branch of the Fed, said the central bank needed to be more aggressive in its efforts to root out the highest inflation in four decades as he called for rates to rise to a point where they actively curtail growth.
The comments from Bullard, a voting member of the policy-setting Federal Open Market Committee and one of its foremost hawks, run counter to other officials, who are broadly aligned on the need to push rates closer to a “neutral” level this year.
That is the level at which rates neither fuel nor restrict economic activity and is estimated to be around 2.4 per cent. Bullard said the central bank would need to get beyond that threshold as quickly as possible this year if it wanted to bring inflation closer to the Fed’s longstanding 2 per cent 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,” he added. “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.”
His comments come on the heels of new inflation data that showed consumer prices increased at an annual rate of 8.5 per cent in March following a surge in energy and fuel costs driven by Russia’s invasion of Ukraine.
“Core” inflation, which strips out volatile items such as food and energy, came in slightly lower than expected, but Bullard warned it would not come down without a concerted effort from the Fed and that the US was vulnerable to unforeseen shocks that could further stoke prices.
“This [inflation] report just underscores the urgency that the Fed is behind the curve and needs to get moving,” he said.
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