Fed’s Bullard Calls for Fed to Get Inflation on Sustainable Path Down Toward 2% Goal

St. Louis Federal Reserve President James Bullard sounded the hawkish alarm on Wednesday when he said the Fed needs to get inflation on to a sustainable path down toward its 2% goal this year or risk a repeat of the 1970’s when interest rates had to be repeatedly ratcheted up.

Inflation Must Come Down

“Our risk now is inflation doesn’t come down and reaccelerates and then what do we do? We are going to have to react, and if inflation doesn’t start to come down, you risk this replay of the 1970s where you had 15 years where you’re trying to battle the inflation drag, and you don’t want to get into that,” Bullard told broadcaster CNBC in an interview.

“… That’s why I’ve said let’s be sharp now, let’s get inflation under control in 2023 and it’s a good time to fight inflation because the labor market is still strong, Bullard added.

Markets have Overpriced a Recession

In addition to his comments about inflation and interest rates, Bullard further added that he thinks the U.S. economy is more resilient than many investors have thought.

“I think markets have overpriced a recession in the second half of 2022 and overprice a recession in the first half of 2023 and maybe they are overpricing the chances of a recession in the second half of 2023,” Bullard said in an interview on CNBC.

He also mentioned that China’s recovery from the strict COVID restrictions and Europe’s rebound since the start of the war are reasons to believe in the U.S. economy’s strength.

“It kind of seems like the U.S. economy might be more resilient than markets thought, let’s say, six to eight weeks ago,” he said.

Bullard said he was looking for moderately slow growth with inflation declining in 2023.

“We have a good shot at beating inflation in 2023,” he said, with the Fed focused on inflation and Congress focused on deficit reduction, he added.

Bullard Sees Strong Labor Market

“I just think that we have a very strong labor market, combined with more momentum coming out of the second half of 2022 then we previously thought,” Bullard said. “That adds up to markets wanting to price in a tougher road ahead for disinflation in 2023.”

“Let’s hope that we get disinflation in 2023, but right now it’s hotter than we thought,” he added.

Fed Minutes on Tap

The Fed is scheduled to release the minutes of its last policy meeting at 19:00 GMT. The minutes could over clues as to how many other Fed members share Bullard’s view. Ahead of the minutes, Bullard is expecting short-term interest rates to peak between 5.25%-5.50%.