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Investing.com – Significant comments came from Fed member James Bullard, who called for a 50 basis point rate hike before the halt and also downplayed the chances of a major banking recession or crisis as soon as Wall Street expects it.
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A member of the US Federal Reserve called for the need to continue raising interest rates on the back of recent data that reveals that inflation is still present while the economy is still able to grow and expand, albeit at a slower pace.
Pollard disputed Wall Street’s predictions of a banking crisis or a recession or both in the near future. “Wall Street is very caught up in the idea that there’s going to be a recession in six months or something like that,” Pollard told Reuters in an interview. “.
Pollard continued: Thoughts of rate cuts and transition are linked to a recession, but the job market looks very strong. The conventional wisdom is that if you have a strong job market that is fueling strong consumption and that’s a big part of the economy and so it doesn’t look like this is the moment when you would expect a recession in the second half of 2023.”
Despite the current unemployment rate of 3.5%, Fed staff said at the central bank’s March 21-22 policy meeting that they also expect a “moderate recession” this year, while Bullard’s colleagues set their economic forecasts pointing to growth. Zero or prolonged contraction. From the rest of the year after a relatively strong first quarter.
And about the banking crisis, Bullard said that if the failure of two US banks last month would spark a crisis, it would likely appear in things like the Financial Stress Index of the Federal Reserve Bank of St. Louis. The index rose after the collapse of the Silicon Valley bank on March 10, but quickly returned to a normal reading.
“If you were really going to get a big financial crisis out of this, that index would go up to four or five. It’s zero now. So it doesn’t look like, at this point, that much is happening,” Pollard said.
Bullard’s remarks focus on the aggressive side of the debate at the Fed about how to calibrate the final steps of a historically rapid rate-raising cycle against both evidence that core inflation is not declining too quickly toward the central bank’s 2% target, and evidence that the economy is slowing as “Bite” approved increases to date.
Actions such as the Dallas Fed’s rate cut mean the inflation rate has been flat for several months, which is an indication – depending on the viewpoint – of core inflation still more than twice the Fed’s target to be crushed, or the lagging effect of monetary policy not Still to be felt.
Bullard believes the policy rate needs to be raised another half percentage point above that level, to between 5.50% and 5.75%.
Some policymakers and analysts worry that these final steps could tip the economy into recession. After next month’s rate hike decision, the Fed will have to send some signals about what happens next – whether it will retain the language in its current policy statement that “some additional policy may be appropriate”, or suggest a pause.
Once interest rates reach a level deemed “tight enough” to slow inflation, the bias will be to keep levels high for longer to ensure that inflation is fully under control.
Bullard argued that it wouldn’t take a huge increase in the unemployment rate to do the job, a view that mixes hawkishness on inflation with relative bullishness about which direction the economy is heading.
But it will take more time for people, businesses and local governments to spend through their savings in the pandemic era, and as spending slows, so does price competition among businesses to curb inflation over time.
Recession forecasts “come from models that place a lot of weight on the idea that interest rates have gone up quickly,” Bullard said. “What about a strong labor market? What about this nutritional consumption?… And what about the pandemic money that still has to be spent, at the state level, local level and at the individual household level?”
“Inflation is coming down, but not as fast as Wall Street would expect.”
