Fed Official Sends Hawkish Signal, Sees Policy Becoming ‘More Aggressive Rather Than Less’ to Tame Inflation

President of the Federal Reserve Bank of St. Louis James Bullard speaks during an interview with AFP in Washington, D.C., on Aug. 6, 2019. Photo by Alastair Pike/AFP via Getty Images

Jim Bullard, president of the Federal Reserve Bank of St. Louis, has dismissed the possibility of the central bank easing its policy-tightening stance, warning that it might instead become even more aggressive.

“Markets are underpricing the risk that the FOMC [Federal Open Market Committee] will have to be more aggressive rather than less aggressive in order to contain the very substantial inflation that we have in the U.S.,” Bullard said in an interview with MarketWatch on Nov. 28. He believes the Fed might stop after rates top 5 percent and that it may “probably have to stay there” for 2023 and 2024.

The federal funds rate was only 0.25 percent at the beginning of the year, which has since been pushed up to 3.75–4.0 percent in November. Borrowing costs are now at their highest level since 2008.

In the interview, Bullard dismissed the idea of the Fed abandoning its inflation target of 2 percent, warning that it would be a “completely terrible idea for this environment.”

Such a decision would unleash “global chaos” with regard to inflation and take the country “almost certainly to the 1970s’ kind of chaos.”

The 12-month Consumer Price Index (CPI), a measure of annual inflation, was at 7.7 percent in October. Annual CPI has remained at or above 7.5 percent for every single month this year. Comparatively, in January 2021, the 12-month inflation rate was only 1.4 percent.

Restrictive Policy

Bullard said that the Fed policy rate needs to reach the bottom end of the 5.0–7.0 percent range to be sufficiently restrictive of inflation.

“The fact that the labor market is so strong gives us license to pursue our disinflationary strategy now and try to get the inflation under control now,” he said. “So we don’t replay the 1970s, where the FOMC at that time took 15 years to get inflation under control.”

Admitting that recession is not inevitable, the Fed official said he is expecting the American economy to see below-trend GDP growth in 2023.

Minutes from this month’s FOMC policy meeting had shown that the Fed does not think inflation pressures are easing.

Participants pointed out that inflation risks are still “skewed to the upside” and that a persistent reduction in inflation might require a “greater-than-assumed amount of tightening in financial conditions.”

The October 2022 Survey of Consumer Expectations by the Federal Reserve Bank of New York had shown that inflation expectations among Americans have risen for the short, medium, and long terms. Meanwhile, unemployment expectations hit their highest level since April 2020.