MNI INTERVIEW: Ex-Fed's Bullard Sees Several Rate Hikes Ahead

The Federal Reserve will likely need to raise interest rates multiple times over the coming months to cool inflation running well above the FOMC's red line of 3%, even as the jump in energy costs from the Iran conflict has had a more-benign-than-feared effect on prices, former St. Louis Fed President James Bullard told MNI.

The most severe outcomes from the war have not been realized and so pricing around those fears have also been reduced despite the lack of a lasting military resolution, he noted. 

Yet core PCE inflation, which throws out the energy component, is running at 3.4% on a 12-month basis -- nearly a full percentage point and a half above the Fed's 2% goal, leaving the committee with limited room to wait, he said. Headline inflation is far above target at 4.1% in May.  

"The committee has to take on board that they've been a little too dovish on this and that they need to take action to reinforce credibility with the markets on inflation," Bullard said in an interview. "It's hard to tell a story that core PCE inflation is going to come down dramatically just because oil prices are less high than expected."    

Markets are pricing nearly 50% chance of a move at this month's meeting, but Bullard said September remains the more likely point for action, giving the committee time to assess whether lower oil prices are doing more to ease inflation than expected. 

A hotter-than-anticipated inflation report -- starting with Tuesday's CPI data -- could accelerate that timeline, especially as the labor market concerns that once justified a more patient approach are now off the table, he said.

"They likely would wait until September, because I think they legitimately would like to see if the decline in oil prices is having a lot more of an effect than people are expecting. And if that's true, then that's kind of diminishing the inflation argument," he said.

"They already have in their June SEP a benign outlook for inflation -- 0.2% every month for the rest of the year -- so it seems like it'd be fairly easy to surprise on the upside to that. So I think it won't be too long here, and we'll get either this report or subsequent reports will come in hotter than expected, and then the committee will feel like they have to move." (See MNI INTERVIEW: Fed Prepares To Hike On Sticky Inflation-Mester)

BYE DOTS

Bullard reckoned the Fed's dot plot isn't likely to survive under Kevin Warsh after the chairman withheld his own submission at his first FOMC meeting. Instead, the Fed may move toward a quarterly monetary policy report similar to those published by the Bank of England and the European Central Bank, with a baseline forecast that individual officials could then endorse or dispute. 

"I don't know that the dot plot is long for this world," Bullard said, citing structural flaws the committee never resolved such as dots that are unlinked to other projections and untethered to any names. Bullard himself broke with the committee and refrained from submitting a longer-run projection for the fed funds rate when he was on the FOMC. 

No dots from Warsh was "a good move on a tactical level," since it heads off speculation about which projection belongs to a chair who is making a point to move away from committing to future moves, Bullard said. 

"Why not just have a 30-page report" with box analyses of AI or other events and multiple scenarios, he said. 

"That's the full picture of here's where we think the economy is at this point, and that's really what the market and investors crave, and households that want to get a sense of considering everything on the table."