Fed: rapid rate hike does not mean recession (James Bullard)


James Bullard, considered the most “hawkish” member of the Fed when it comes to rate hikes, played down the risk of a recession in the United States, while advocating to act in a “direct and offensive way” to make slow down inflation.

(Boursier.com) – Investors appreciated Friday the last words of the boss of the Fed of Saint-Louis, James Bullard, who estimated that a recession can be avoided in the United States, an assertion which he had already made Monday.

Bullard, considered the Fed’s most “hawkish” member when it comes to rate hikes, played down the risk of a recession in the United States, saying that the rate hike was likely to bring growth back to its long-term trend, but not below it.

During a debate on central banks and inflation organized by UBS in Zurich, Switzerland, he considered that “we are in the first stage of an expansion phase in the United States (…) Unless we are hit by a shock, it would be unusual to fall back into recession at this point.”, he hammered. James Bullard reiterated his wish to see the “fed funds” rate rise to 3.5% by the end of 2022, explaining that the central bank could consider reducing the cost of credit once inflation subsides.

We must act in a direct and offensive way to allow a reversal of the trend of inflation and to regain control of it (…) otherwise we could experience a decade of high and fluctuating inflation,” he said. “So act fast now, quickly regain control of inflation and bring the inflation on the way to 2%,” he added.

James Bullard’s remarks coincided with the publication by the University of Michigan of US consumer expectations for 12-month inflation, which fell slightly in June, to 5.3% from 5.4% in May. This change was enough for investors to begin to hope that inflation will peak before the end of 2022, which could discourage the Federal Reserve from continuing to raise its key rates in 2023.

Towards a pause in rate hikes in 2023?

On the futures markets, Friday evening, expectations for further key rate hikes in 2023 decreased at the end of the week. CME Group’s FedWatch tool thus anticipated that the “fed funds” rate will be around 3.5% at the end of 2022, and that it will remain at the same level, or even slightly lower, by July 2023..

The probability of a rate equal to or lower than 3.25%-3.5% was greater than 61%, while the probability of a rate at 3.5%-3.75% was 25%, and that from a rate of 3.75%-4% to only 11%.

The markets are therefore now a little more optimistic than the Fed itself. In its latest economic projections published on June 15, the US central bank estimated that its key rates could be around 3.4% at the end of 2022 and 3.8% at the end of 2023, against remember 1.50-1.75% currently. A further rise of 75 basis points is expected in July to counter inflation (CPI) which reached 8.6% in May in the United States, and could exceed 9% in the coming months before falling back, according to the economists.

The inflation measure most followed by the Fed, the “core PCE” index came out lower, at 4.9% over one year in April, down from March (+5.2%) and February (+5.3%), but it remains well above the Fed’s medium-term target of 2%. The May “core PCE” will be released on June 30th.



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