Fed’s Bullard says continued high inflation is straining central bank’s credibility
St. Louis Federal Reserve Chairman James Bullard reiterated Thursday that persistently high inflation is straining the central bank‘s credibility, according to his prepared presentation.
“The current US macroeconomic situation is straining the credibility of the Fed with regard to” its mandate of bringing inflation down to 2%, Bullard said, adding that expected inflation and actual inflation should be closely linked.
Although there is a risk that inflation expectations are no longer anchored, 5-year and 5-year inflation expectations have been falling since their peak of 2.67% on April 21, standing at 2 .10% as of July 6 amid fears of a deepening recession, according to FRED data.
Still, “the current divergence between actual inflation numbers and TIPS-based expected inflation will need to be resolved, which could lead to even higher inflation expectations,” Bullard explained.
The Fed has raised its benchmark lending rate by 175 basis points so far in 2022 and it began to liquidate its balance sheet in early June, although consumer price inflation (at least on a Y/ Y) always oscillates around 40 years.
In addition, the labor market remains “robust,” Bullard said, citing the Kansas City Fed’s labor market conditions index, which is at highs last seen in 1999-2000. In turn, production is expected to continue to increase until 2022, he added.
Earlier (June 24), James Bullard wanted to raise the policy rate to 3.5% by the end of 2022.