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Fed official: It’s ‘fantasy’ to think modest rate rises will tame inflation

A top Federal Reserve official has warned it is a “fantasy” to think the US central bank can cut inflation enough without raising interest rates to levels where they constrain the economy.

James Bullard, president of the St. Louis branch of the Fed, said the central bank needed to be more aggressive in its efforts to stamp out the highest inflation rate in four decades when he called for rates to rise to a point where they actively limit growth.

The comments by Bullard, a voting member of the Federal Open Market Committee’s policy-making committee and one of its chief hawks, run counter to other officials, who broadly agree on the need to move interest rates closer to “neutral” levels this year. to bring.

That is the level at which tariffs limit neither fuel nor economic activity and is estimated to be about 2.4 percent. Bullard said the central bank should get above that threshold as soon as possible this year if it wants to move inflation closer to the Fed’s long-standing target of 2 percent.

“I think there’s a bit of fantasy in current central bank policies,” Bullard said in an interview with the Financial Times. Neutral puts no downward pressure on inflation. It just stops putting upward pressure on inflation.”

“We need to put downward pressure on the component of inflation that we think is ongoing,” he added. “Going to neutral won’t be enough, it doesn’t seem, because while some of the inflation may come down on its own. † † there will be a part that won’t.”

His comments follow new inflation data showing consumer prices rose 8.5 percent year-on-year in March following a rise in energy and fuel costs following Russia’s invasion of Ukraine.

Core inflation, which excludes volatile items like food and energy, came in slightly lower than expected, but Bullard warned it would not fall without a concerted effort from the Fed and that the US was vulnerable to unforeseen shocks that price the fuel.

“This one [inflation] report only underscores the urgency that the Fed is behind the times and needs to move,” he said.

A separate report Wednesday showed further evidence of rising inflation as prices paid to U.S. producers rose 11.2 percent in March, the fastest pace since the first year-over-year figure calculation in 2010.

Bullard backs the Fed to hike rates by half a percentage point at its next policy meeting in May, something he urged the FOMC to do at its March meeting when it raised interest rates by a quarter point.

More officials now support such a move, as well as a reduction in the size of the Fed’s $9 trillion balance sheet soon.

He said the Fed’s policy rate should rise “strongly” after the May meeting and approved a 3 percentage point hike in the Federal Funds rate from its current range of 0.25 percent to 0.50 percent by the third. quarter.

Bullard acknowledged that such a level was “ambitious” in such a short time, but warned that the Fed’s credibility would be at stake if it failed to act.

“If markets and households get the idea that the Fed won’t do the right thing and keep inflation under control, then you have to gain credibility by actually doing things that show you mean it,” he said.

Bullard pointed to former Fed Chairman Paul Volcker’s decision to raise interest rates to 20 percent at some point in the early 1980s, which, while curbing inflation, resulted in a sharp economic contraction that resulted in millions of job losses. Volcker had no choice but to make such a large increase “because the commission was not sufficiently credible,” Bullard added.

“So far, I think we’re keeping our credibility, but if it slips, it’s going to be much harder to control inflation going forward.”

Still, Bullard said he was optimistic the Fed could cool the economy without triggering a recession — as it did in 1994.

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