St. Louis Federal Reserve Bank President James Bullard sent markets tumbling on Friday when he predicted an interest rate hike in late 2022, earlier than the central bank consensus.
Bullard, who has led the St. Louis Fed since 2008, said that inflation has been running hotter than the Federal Reserve had anticipated. His remarks come the same week the Fed revised its economic numbers, predicting higher inflation by year’s end.
“The inflationary impulse, I think, is more intense than we were expecting,” Bullard said Friday morning on CNBC.
On Wednesday, central bank officials projected that they would begin raising rates by 2023. Inflation fears are percolating among some economists, and consumer prices increased 5% for the year ending May, according to a report released last week by the Department of Labor — the largest 12-month increase since August 2008.
FED OFFICIALS NOW SAY THEY EXPECT TO RAISE RATES BY 2023
Bullard characterized the central bank’s tilt this week as “hawkish.” He also predicted that despite rising inflation, the rate will eventually drop back down to the central bank’s 2% target.
“We’re expecting a good year, a good reopening. But this is a bigger year than we were expecting, more inflation than we were expecting,” he said. “I think it’s natural that we’ve tilted a little bit more hawkish here to contain inflationary pressures.”
Stock market futures dropped sharply as Bullard spoke, and the Dow Jones Industrial Average was down more than 400 points on Friday morning after previously dropping following the Wednesday Fed news. The Dow is on track for its worst week since January.
While the Fed acknowledged increasing inflation by raising its end of the year projection from 2.4% to 3.4%, it still predicts the high figure will be transitory and will fall to 2.1% in 2022 and hold steady at its 2% goal in the longer run.
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Central bank officials also projected that unemployment would fall to 4.5% by the end of the year and that real gross domestic product would rise to 7%, which is an increase from the 6.5% previously projected in March’s policy statement. Bullard said the overall economic growth during reopening has been “very good news.”
“You love to have an economy growing as fast as this one, you love to have a labor market improving the way this one has improved,” he said.
The Fed has kept interest rates at near-zero since the start of the pandemic, although some economists are questioning that tactic given the increasing consumer costs and fears that inflation could be more than transitory.
