Fed’s Bullard says rapid rise in interest rates now is the best way to avoid recession later

The president of the Federal Reserve of St. Louis said Friday that the U.S. is more likely to avoid a recession if the central bank raises interest rates faster than usual in an attempt to dominate the strongest rate of rising inflation in 40 years .

At a UBS conference in Switzerland, James Bullard said an aggressive response is the best way to “cut inflation off suddenly before it fixes the economy.” The sooner inflation begins to moderate, he said, the less the Fed will have to raise rates later.

“If all goes well, inflation will start to go down to ours [2%] goal, you won’t need the political rate to be so high, ”Bullard said.

Last week, the Fed raised its short-term benchmark interest rate to a range of 1.5% to 1.75% and indicated that it could reach 3.4% to end of year. Higher rates increase the cost of loans for credit cards, mortgages, new cars and other consumer and business loans.

Bullard has been the most open Fed official in favor of higher rates. Last year he warned that the central bank misjudged inflation, but only in the last six months have other senior Fed officials come to the same conclusion.

The combination of high inflation and rising interest rates has raised new concerns about the collapse of the recessionary economy, but Bullard said the talk is premature.

He pointed to strong consumer spending and the U.S. labor market as evidence that there is no broad economic slowdown underway.

While a recession is “surely possible,” he said, “I actually think we’ll be fine.”

Other senior Fed officials have echoed this view, including President Jerome Powell, but it is very rare for central banks to predict a recession given the power they have over the economy and the political sensitivity of these statements. .

Earlier this week, for example, Massachusetts Sen. Elizabeth Warren warned Powell that she would blame the Fed if the U.S. went into recession because of higher rates.

Bullard, for his part, insisted that higher rates would only slow the economy to “a faster-growing growth rate than going below the trend.” An annual growth rate of approximately 2% is considered the trend level.

He noted that interest rates pushed to “abnormally low levels” during the pandemic and are unlikely to rise to particularly high levels as in the past. The Fed kept its short-term rate close to 0% for most of the pandemic.

“You have to do your best and see if we can get that to happen,” he said. “If we don’t do it now, you could suffer a decade of high-end variable inflation.”

However, it could be a bumpy ride for investors. He said the market reaction “will be painful, it will be more volatile than it would look otherwise.”

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