One person who has an inside look into how the Fed views those reports is former Federal Reserve Bank of St. Louis President and current Purdue Daniels School of Business Dean James Bullard.
Bullard thinks the FOMC was ready to cut rates in the first quarter, but the hot inflation reports caused them hold back.
On the possibility of another rate hike coming before a rate cut, Bullard thinks that rather than raising rates, the hawks on the committee "can just stay where they are because the policy rate is pretty high, and it has been viewed as restrictive."
The biggest battle for the Fed has been getting inflation down to its 2% target. The central bank has kept rates at a restrictive level and yet inflation has proven to be stickier than many people thought. So, how can the central bank bring inflation down without sacrificing jobs? As Bullard describes it, it is an "art form" to try to strike a balance, but with "the relatively high value of the policy rate and expectations of inflation lower than they were, lets say, a year-and-a-half ago, I think that that means the price change in the economy will eventually come back to the 2% target." He adds that "we're still on track for a soft landing, but it's going to take a little longer than previously thought."
Overall, "even though inflation isn't quite down to the target yet," Bullard believes the Fed "will still get inflation down to 2% with a pretty strong economy."
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This post was written by Stephanie Mikulich.
Video Transcript
JARED BLIKRE: Consumer sentiment falling today as expectations for inflation over the next year tick up to 3.1% highlighting Americans frustration with high prices after a hotter than expected CPI print earlier this week. For more on what this means for rate cuts from the Fed, we're bringing in Jim Bullard, former Saint Louis Fed President and Dean of the Purdue Daniels School of Business.
Thank you for joining us here today. A lot can change in a week. And I note that last Friday, you were in front of the National Association for Business Economics in Washington talking about the need for rate cuts saying it's probably wiser to go sooner, but slower.
You talked about the dangers of waiting. But in the interim, we've gotten this higher than expected CPI print. Just wondering what your thinking is now.
JIM BULLARD: Yeah, if you look at the policy rate, and you think the policy rate was right last summer when inflation was 200 basis points higher than it is today, then you have to wonder, well, why hasn't the policy rate come down a little bit in response to the good inflation news? Now, I think the committee was ready probably to go ahead here in the first quarter. But all three inflation reports for the first quarter came in hot. So it wasn't a good time to make that first move. And that's where we're sitting today.
JOSH LIPTON: Jim, what do you make of Larry Summers comments here? This week, Mr. Summers on x posting you have to take seriously the possibility, he says. That the next rate move will be upwards rather than downwards. Give me your response to that.
JIM BULLARD: Well, I mean, take seriously, the possibility I suppose we should always take that into account. I think for the Hawks on the committee, if they want to continue to put downward pressure on inflation, they can just stay where they are because the policy rate is pretty high. And it has been viewed as restrictive.
So from that point of view, I think you just stand pat. And for those that are concerned about inflation still hanging up at 3%, that would be one way to combat that.
JARED BLIKRE: Jim, we got some big bank earnings out today. I don't need to get into the nitty gritty details. But broadly speaking, there were some concerns about net interest income projections for the year. And we also got a look on the consumer. Just wondering, what factors should we be paying attention to right now given these big bank earnings and a slate next week? That would tell us. Give us information about the economy and also potentially the path of Fed rate cuts or potentially hikes.
JIM BULLARD: Yeah, I think it's been relatively difficult time for banks since SVB last March about a year ago. And a few other banks at that time. The larger banks tended to profit from that because they got some traffic moving toward them and away from the big regionals. I think that's probably retrenching a little bit now.
I think that the market overinterpreted SVB last year and started to predict 100% probability of recession. I have to smile. This is macroeconomics. There isn't 100% probability of anything.
So, you know, that turned out not to be right. And the economy actually boomed in the second half of 2023 instead of going into recession. I think, I mean, my broad read of this is that was good for very large banks. But now, there's probably some payback.
JOSH LIPTON: Jim, I'm interested what you think needs to happen in order for inflation to get back to the Fed's target. Does the labor market need to significantly weaken? Is that it, Jim?
JIM BULLARD: I don't really think so. I think you could have a strong labor market as we did in the second half of the 1990s. And you could still push inflation right to the 2% target. It is an art form.
And these things are not terribly precise. But still, I think with relatively high value of the policy rate and expectations of inflation lower than they were, let's say a year and a half ago.
I think that means that the price change in the economy will eventually come back to the 2% target. It hasn't been quite as smooth as we would have hoped over those three months. But on the other hand, we did get a lot of disinflation in the second half of 2023. Even as the economy boomed during that period.
So I think it's all still possible. I think we're still on track for a soft landing. But it's going to take a little longer than previously thought.
JARED BLIKRE: Jim, I want to dial back to mid-2022. You penned a missive here for when you were a president of the Saint Louis Fed. And you talked about similarities at the time between then in 1983 and also the high inflationary period back then.
And you were a proponent of the rapid hikes that we experienced in 2022. You were making the case. And here's one thing that you wrote.
In 1983, the FOMC kept the policy rate relatively high even as inflation declined. Real interest rates were very high. You go on to say one might have expected the high real interest rates to cause a recession. But that didn't happen.
The US experienced a robust expansion during the remainder of the '80s and didn't have a recession until 1991. I was just wondering, do you think in any way that fears of a recession really are overblown and that we could actually stick with these higher real rates for longer than perhaps economists think?
JIM BULLARD: Yes, I do. And I think that was talking about the '80s. But the '90s are another good example where the Greenspan Fed increased the policy rate dramatically in 1994. Some 300 basis points.
Not quite as much as the current episode. But quite a lot at the time. And they did push inflation down to 2% by 1995, '96.
They made a few adjustments down. But basically, that's interest rates stayed for the second half of the 1990s. And the economy boomed during that period. That was one of the best periods in the whole post World War II era for the US economy.
And we were talking about actually paying off the entire national debt. So it shows you how good things can get if everything goes well. So I think we are in good position today to have a similar type of outcome.
Inflation isn't quite down to the target yet. But it's certainly over the last nine months, it's gone in the right direction.
And these most recent inflation reports notwithstanding, I think, we'll still get inflation down to 2% with a pretty strong economy and some potential for a productivity boom similar to the one that we had in '95 to 2000 period.
JOSH LIPTON: Jim, thanks so much for joining the show. Appreciate it.