The Federal Reserve may need to raise its benchmark interest rate much more than it previously forecast to get inflation under control, James Bullard, President of the Federal Reserve Bank of St. Louis, said Thursday.
Bullard’s comments raised the prospect that Fed rate hikes will make it even more expensive for consumers and businesses to borrow and further increase the risk of a recession. Wall Street traders sent in their concerns stock market into the red Thursday. This&P 500 ended the day down 12.23 points, or 0.3%, at 3,946.56.
Bullard’s comments followed speeches by other Fed officials in recent days who have suggested they see only limited progress in using steadily higher interest rates to fight inflation. Bullard’s views have added significance as he is a voting member of the Fed’s Rate Setting Committee this year.
The Fed’s short-term policy rate “has not yet reached a level that could be justified as sufficiently restrictive,” Bullard said. “In order to reach a sufficiently restrictive level, the key interest rate must be increased further.”
The Fed is keen to raise lending rates to levels that slow economic growth and hiring to cool inflation.
The central bank has been quick to raise interest rates by an aggressive three-quarter point at each of its last four meetings — the fastest string of rate hikes since the early 1980s. The cumulative effect has been to make many consumer and business loans more expensive and increase the risk of a recession.
These hikes have pushed the Fed’s short-term interest rate to a range of 3.75% to 4%, from almost zero last March to its highest level in almost 15 years.
Bullard suggested the rate might need to rise to levels between 5% and 7% to quell inflation, which is near a four-decade high. However, he added that this level could fall as inflation cools in the coming months.
Cleveland Fed President Loretta Mester echoed some of Bullard’s remarks in her own speech Thursday when she said the Fed was “just beginning to move into hawkish territory.” This suggests that Mester, one of the more hawkish policymakers, also expects rates to have to go much higher.
In Fed parlance, hawks tend to focus on raising rates to fight inflation, while doves typically prefer lower rates to support growth and hiring.
In contrast, Fed Vice Chair Lael Brainard, a more dovish official, hinted several times Monday that the Fed had already raised rates to levels that stifled growth, although she added that the central bank was “further into hawkish” territory had to advance.
And on Wednesday, Kansas City Fed President Esther George said in an interview with the Wall Street Journal that a recession is likely given how quickly the Fed has tightened lending.
“I’ve never seen a period of this type of tightening in my 40 years at the Fed that didn’t have painful results,” she said.
Fed officials, including Chair Jerome Powell, have clearly signaled that they are likely to hike rates by half a percentage point at their next meeting in December, a step down from their previous hikes.
At the same time, however, they have taken pains to stress that the smaller hikes – most analysts are expecting a quarter-point hike at the February and March meetings – do not mean that the Fed is necessarily nearing an end to its hikes, as financial markets have often assumed .
“Pausing is off the table right now — it’s not even part of the discussion,” San Francisco Federal Reserve Chair Mary Daly said in an interview on CNBC on Wednesday.