MNI: Bullard Sees ‘Continued’ Hikes To Lock In Disinflation

The Federal Reserve should keep raising interest rates to ensure the recent disinflationary trend continues and inflation expectations remain well anchored, St. Louis Fed President James Bullard said Thursday.

“Continued policy rate increases can help lock in a disinflationary trend during 2023, even with ongoing growth and strong labor markets, by keeping inflation expectations low,” he said, without specifying how much further he would like to see rates rise. He said inflation remains too high despite recent declines.

Market expectations for Fed tightening have ratcheted some 40 basis points higher in the last two weeks after strong jobs and inflation data boosted the perception that more rate hikes will be needed. (See MNI: Fed Rate Peek Looking Perkier As Jobs Boom-Ex-Officials)

Bullard said the economy’s prospects are robust despite Fed tightening, arguing that real GDP growth could be in “a neighborhood of the potential growth rate of about 2% on a year-on-year basis after stellar growth in 2021.”

He said the Fed’s front-loaded approach to interest rate hikes, which have seen rates jump from near-zero to between 4.5% and 4.75% in less than a year, has served to keep inflation expectations in check.

“In part due to front-loaded Fed policy during 2022, market-based measures of inflation expectations are now relatively low,” Bullard said, repeating that he expects 2023 to be a disinflationary year.