Former Federal Reserve Bank of St. Louis President James Bullard said investors were too complacent on inflation and the central bank might have to increase interest rates as high as 6.5% if it starts to rise again.
(Bloomberg) — Former Federal Reserve Bank of St. Louis President James Bullard said investors were too complacent on inflation and the central bank might have to increase interest rates as high as 6.5% if it starts to rise again.
“The risk that’s underpriced in markets is that disinflation stalls out or stops altogether and core PCE inflation starts to go up again,” he said Friday in Marrakech, Morocco, at a Euro50 seminar on the sidelines of the annual meetings of the International Monetary Fund and World Bank. “That would start a whole new round of consternation among policymakers about whether they’ve done enough.”
6% to 6.5%
“If that happens the committee will have to contemplate going to 6% or 6.5%,” said Bullard, who stepped down from the Fed in August to take a job in academia.
Fed officials held rates steady in a 5.25% to 5.5% target range at their last policy meeting in September, while leaving the door open to doing more to ensure inflation returns to their 2% target. The next Federal Open Market Committee rate decision is scheduled for Nov. 1.
Data Thursday showed that the core consumer price index, which excludes food and energy costs, increased 0.3% last month. Economists favor the core gauge as a better indicator of underlying inflation. The overall CPI climbed 0.4%, higher than expected, boosted by energy costs.
Both increases are consistent with an annual pace well above the Fed’s 2% goal.
A majority of Fed officials in September projected one more rate increase this year in their summary of economic forecasts. Bullard said that was helpful in avoiding an unwanted loosening in financial conditions.
“One thing that I like about where the FOMC is today is that you’ve got this extra additional rate on the table,” he said. “I think that prevents the market from saying that the next move has to be down.”
(Updates with more Bullard comments in final paragraph.)
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