Bullard Sets Tone for Fed Officials Signaling Hikes Will Roll On

(Bloomberg) — St. Louis Fed President James Bullard said policymakers should raise interest rates to at least 5% to 5.25%, hitting financial markets as investors recalibrated bets on how high officials would go.

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“In the past I have said 4.75% to 5%,” he told reporters Thursday after giving a speech in Louisville, Kentucky. “Based on this analysis today, I would say 5% to 5.25%. That’s a minimum level. According to this analysis, that would at least get us in the zone.”

Chair Jerome Powell said earlier this month that rates will need to rise more than previously expected due to disappointing inflation data, while suggesting that officials could moderate the size of their increases going forward. A key reading on consumer prices since then was better than expected but policymakers continue to stress the need to keep raising rates.

Officials in September had projected rates rising to around 4.6% next year from a current target range of 3.75% to 4%. Those projections will be updated at the Fed’s Dec. 13-14 meeting.

US 10-year Treasury yields climbed after Bullard became the latest official to say that interest rates had further to rise to curb the strongest inflation in 40 years.

San Francisco Fed President Mary Daly said on Wednesday that “somewhere between 4.75 and 5.25 seems a reasonable place to think about” for the level that officials should raise rates to then go on hold.

Bullard’s hawkish tone was echoed later on Thursday by Minneapolis Fed President Neel Kashkari, who said it’s an “open question” how far the central bank has to go with rates to bring demand back into balance.

“I need to be convinced that inflation has at least stopped climbing, that we’re not falling further behind the curve before I would advocate stopping a progression of future rate hikes, so we’re not there yet,” he told the Minnesota Chamber of Commerce’s 2022 Economic Summit.

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“The Fed is still maintaining a outward appearance of hawkishness pending another month of inflation data,” said Guy LeBas, chief fixed-income strategist for Janney Montgomery Scott LLC in Philadelphia. “One month of lower inflation doesn’t mean the war is over.”

Data last week showed consumer inflation rising by a less-than-expected 7.7% in the 12 months through October. November’s reading will be released on Dec. 13, before officials begin their two days of policy deliberations.

During his presentation, Bullard showed charts that indicated rates will need to be between about 5% to 7% to meet policymakers’ goal of being “sufficiently restrictive” to curb inflation near a four-decade high.

The calculation used different versions of a Taylor Rule, a popular monetary policy guideline developed by Stanford University’s John Taylor.

‘Minimal’ Level

“It’s easy to make arguments that before this is all over you’d have to go to much higher levels of the policy rate” than 5.25%, said Bullard, who votes on policy this year. “But for now I’d be happy to get to the minimal level and that’s why I think the committee is going to have to do more.”

The St. Louis Fed leader, who has been among the more hawkish policymakers this year, was the latest central banker to call for additional action.

The Fed raised rates by 75 basis points on Nov. 2 for the fourth straight time as part of its most aggressive tightening since the 1980s to curb an inflation that started in the wake of the Covid-19 pandemic disruptions.

Bullard didn’t say whether he would favor a 50 or 75 basis-point move at the Fed’s December meeting, telling reporters that he would look to Powell to set the direction.

A number of his colleagues have called for a downshift in the size of the next rate increase following last week’s consumer price report, which showed a softening in core consumer goods inflation in October.

Investors expect the Fed will raise rates by a half percentage point next month and see rates peaking around 5% next year.

The St. Louis Fed president said he expected officials to keep rates high for an extended period to avoid the kind of monetary policy mistakes of the 1970s that resulted in persistently high inflation.

“We certainly don’t want to replay that episode,” he told reporters. “So we’re going to have to see very tangible evidence that inflation’s coming down meaningfully toward target, and I think we’re going to want to err on the side of staying higher for longer in order to get that to happen.”

Bullard said while he expected inflation to come down next year, there’s been relatively little evidence of that so far.

“Thus far, the change in the monetary-policy stance appears to have had only limited effects on observed inflation, but market pricing suggests disinflation is expected in 2023,” Bullard said in his prepared remarks, adding rate hikes so far have caused little financial stress.

(Updates with Kashkari comment in seventh paragraph.)

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