Fed’s Pollard says interest rate policy is ‘behind the curve’ but ‘all is not lost’

James Pollard

Olivia Michael | CNBC

St. Louis Fed President James Bullard said Thursday that the Fed needs to raise interest rates significantly to control inflation, but it may not be “behind the curve” as it seems.

Pollard, one of the FOMC’s more “hawkish” members in favor of hawkish policy, said the rules-based approach suggests the central bank needs to raise the benchmark short-term borrowing rate to around 3.5%.

However, the bond market adjustments to The most aggressive Fed policywhere returns have gone higher, indicates that rates are not so skewed.

“If you take into account [forward guidance] We don’t look that bad. All hope is not lost. “That’s the gist of this story,” Pollard said in a speech at the University of Missouri.

“I’m still behind the curve, but not as much as it seems,” he added. Markets are pricing rates as high as 3.5% in the summer of 2023, slightly slower than Bullard expects, according to CME Group data.

Comments come the next day Minutes from the Federal Open Market Committee’s March meeting Officials signaled imminent approval of a 50 basis point rate hike but settled at 25 due to uncertainty over the war in Ukraine. The base point is 0.01 percentage point.

In addition, members said they expect the Fed to begin eliminating some assets on its balance sheet of about $9 trillion, with the potential pace developing to a maximum of $95 billion per month.

Both moves are an attempt to control the inflation going on at Fastest pace in over 40 years.

Bullard, this year’s FOMC voting member, said Thursday that “inflation is too high” and the Fed needs to take action. at Forecast release in MarchPollard called for the highest rates among his peers at the Federal Open Market Committee. He has said he wants to see a 100 basis point increase by June. The Fed funds rate is now in a target range of 0.25%-0.5%.

“Inflation in the United States is exceptionally high and that’s not 2.1% or 2.2% or something like that. It means it’s comparable to what we saw in the era of high inflation in the 1970s and early 1980s,” he said. “Even if you were very generous with the Fed in explaining today’s real inflation rate… you would have to raise the policy rate a lot.”

The Fed uses “forward guidance,” such as a quarterly dot chart of individual member’s interests and economic outlook, to guide the market about where it thinks policy is headed.

Judging by the moves in Treasury yields, the market has already priced in aggressive Fed tightening. This leaves the central bank not as far behind the curve in fighting inflation as it might seem, Bullard said.

“All is not lost,” he said. “The difference between today and the 1970s is that central banks have a lot more credibility. In the 1970s, nobody thought the Fed would do anything about inflation. It was a bit of a chaotic era. I really needed[former Fed Chairman Paul]to come.” Volcker … he killed the inflation dragon and proved his credibility. After that, people believed that the central bank would put inflation under control.”

Volcker’s interest rate hikes lowered inflation in the early 1980s, but not without a double-dip recession.

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