The Feds have recently started to raise interest rates to combat inflation. While they have raised the rates by 25 basis points, it is still not enough to significantly affect the inflation rates now. This is the reason why the Federal Reserve Bank President, James Bullard, has been calling for faster interest rate hikes. He says that the feds will lose credibility if they don’t meet the inflation target.
Inflation and the need for faster rate hikes
Inflation rates recently hit a 40-year high in the US. This is a really big deal as it affects everyone. But James says that the ones with modest incomes suffer the most with such high rates. This is because they have hardly anything to adjust to their lifestyle. To combat this, James thinks that a better option would have been to raise the rates from 0.50% to 0.75% and reduce the Fed’s balance sheet size. At present, they have stopped at 0.50%, with a 25 basis point hike from 0.25%.
The Federal Open Market Committee has an order to make sure that the US prices are stable and a 2% inflation target is maintained. However, they are unable to do it as the inflation rates have crossed 6%, according to the PCE. However, in reality, the situation is much worse. Still, if you consider the official numbers, the authorities are missing their target by 4.1% (410 basis points).
The worst part is there haven’t been enough actions taken to deal with the situation. The interest rates have stayed low for far too long, and inflation rates have surged. Now, if they don’t do anything, the feds will poise the risk of losing credibility on their inflation target. James, therefore, recommends that they at least try to reach 3% by the end of this year. This means they will need to raise the rates by another 250 basis points, which at the current speed isn’t possible. In fact, the FOMC Projected that the rates would be around 1.75%-2% by year-end.
About James Bullard
James Brian Bullard has served as the Federal Reserve Bank of St. Louis’ chief executive officer and 12th president since 2008. He is presently serving a term that began on March 1, 2021, and will end on March 1, 2024. In terms of media influence, he was voted the world’s seventh most important economist in 2014.
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