Fed’s Bullard says the US economy should continue to grow in the coming quarters

The U.S. economy is likely to continue growing in the coming months, St. Louis Fed President James Bullard said Monday, downplaying fears of a deep recession that some economists and market experts see as inevitable amid the central bank’s war- hot inflation.

“In terms of GDP growth, I think the indicators are pointing to continued expansion in the coming quarters,” Bullard told students at the Barcelona School of Economics.

There are risks, but from today’s perspective “there will be further expansion until 2022,” said the policymaker.

The US job market is currently “as good as you’ll ever see,” he said.

Read: The likelihood of a US recession is increasing

Bullard warned that current high inflation remains “well above target” and is very risky for the US economy.

The main risk is that inflation expectations could get off the rails. Inflation is already weighing on the credibility of central banks, he said.

“We still have work to do,” Bullard said, referring to the Fed aiming to tame price pressures.

The Fed must follow its hawkish guidelines to validate market prices that moved prior to the Fed’s action.

“This is reassuring news because it means we’ve already taken action and market prices are already in place, so you’re already feeling some downward pressure on inflation,” Bullard said.

Analysts warning that the US must repeat the sharp Volcker-era recession of the early 1980s to get inflation under control are reading the “false lesson” of history, the St. Louis Fed President said .

Bullard said the current Fed, led by Jerome Powell, currently has more credibility than former Fed Chairman Paul Volcker, who served as chairman of the Fed’s Board of Governors from 1979-1987. Volcker is credited with overcoming one of the US’s worst periods of inflation by encouraging lawmakers to adopt more austere policies, but also faced challenges trying to quell price instability until he convinced markets that he was committed to fighting inflation prescribed at all costs. Volcker pushed interest rates down to around 20%.

“Modern central banks … have far more credibility than Volcker,” Bullard said.

“And because of that, you estimate a higher probability that we can pull off a soft landing than you would otherwise,” he said.

Last week, the Fed raised interest rates by 75 basis points, marking the most aggressive rate hike in almost 30 years. The Fed’s target interest rate is now in a range of 1.5% to 1.75%.

Powell said the central bank could follow the big move with a similar hike next month.

Bullard said the Fed has “moved a lot” but said rate hikes started from very low levels, with initial rates around 0% to 0.25% in the depths of the COVID pandemic.

Bullard said he hopes these rate hikes can repeat the experience of 1994, when the Fed raised its benchmark interest rate on federal funds by 3 percentage points in one year.

Bullard said the concentrated rate hikes in 1994 “prepared the US economy for the outstanding performance of the second half of the 1990s,” with strong growth and a healthy labor market.

“A lot of good things happened in the second half of the 1990s and I hope we can do something like that this time,” he said.

US financial markets were shut down on Monday to celebrate June 16, which officially became a federal holiday last July.

Meanwhile, the yield on the 10-year Treasury note TMUBMUSD10Y,
is up 39 basis points so far in June. Fed’s Bullard says the US economy should continue to grow in the coming quarters

Brian Lowry

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