St. Louis Fed Chief Bullish on Rates, Dismisses Recession Fears

par Howard Schneider

SAINT-LOUIS, Missouri, April 18 (Reuters) – The U.S. central bank is set to keep raising interest rates amid recent data showing inflation remains persistent while the economy as a whole looks set to continue its recovery. growth, albeit slowing, said St. Louis Federal Reserve Chairman James Bullard.

In an interview with Reuters, James Bullard took exception to the idea that the United States is heading towards a banking crisis, a recession or both at the same time in the near future.

“Wall Street is very committed to the idea that there will be a recession in six months or something, but that’s not really how you interpret an expansion like this,” he said. he says.

While some investors are eyeing near-term rate cuts in support of recession risk, the St. Louis Fed boss notes that “the labor market looks very, very strong.” According to him, this is therefore not the time to predict a recession for the second half.

With the unemployment rate currently at 3.5%, James Bullard instead expects the economy to stagnate after a relatively strong first quarter.

Regarding banks, James Bullard believes that if the debacle of Silicon Valley Bank (SVB) and Signature Bank last month were to trigger a crisis, it would probably be observed on tools like the Fed’s Financial Stress Index of Saint Louis.

This index peaked after the bankruptcy of SVB on March 10, but quickly returned to normal, he argues.

“If we really expected a major financial crisis, the index would reach a level of four or five. It is now at zero. So it does not seem, for the moment, that it is happening. a lot,” he said.

A HIGHER TERMINAL RATE

James Bullard’s remarks highlight the debates within the Fed on the latest measures of a monetary cycle marked by an extremely rapid rise in the cost of credit, with officials having to take into account both the level of inflation under underlying and signs of deterioration in the economy.

In March, most Fed officials believed that a final interest rate hike, bringing the “fed funds” to a range of 5.00%-5.25%, would be sufficient. This increase could occur after the meeting of May 2 and 3.

While acknowledging that the tightening cycle may be close to an end, James Bullard believes that the cost of credit still needs to rise by half a percentage point after May’s rise to 5.50%-5, 75%.

Some US central bank officials and analysts fear, however, that such increases could lead to the economy entering recession.

According to CME Group’s FedWatch Barometer, traders are currently pricing in an 87% chance of a quarter-percentage-point rate hike at the Fed’s May meeting.

LIMITED “GUIDANCE”

In view of the evolution of inflation and the economy, James Bullard believes that the Fed must limit its communication on its future orientations.

“We want to be able to react to the data that comes to us throughout the summer and into the fall,” he said. “We wouldn’t want to be trapped by giving forward guidance that we won’t do anything when inflation gets too high or too low,” he added.

Once interest rates are at a level seen as ‘sufficiently restrictive’ to slow inflation, James Bullard says it will take staying at that high level for a long time to ensure inflation is fully contained .

He said it won’t be necessary to sharply increase the unemployment rate to achieve this, but it will take time for consumers, businesses and local communities to spend savings stuck during the COVID-19 pandemic.

(Report Howard Schneider; French version Claude Chendjou, edited by Blandine Hénault)