Fed Bullard: A strong US economy can handle higher interest rates

Washington – Louis Federal Reserve Chairman James Bullard said Monday that the US economy is healthy and showing few signs of an impending recession, and can withstand higher interest rates.

Financial markets are flashing signs that an economic downturn may arrive sometime next year, as Americans grapple with the highest inflation in four decades and the Federal Reserve raises borrowing costs higher. But Pollard said in an interview with the Associated Press that the central bank would not have to push the economy into recession or raise the unemployment rate dramatically to bring inflation down to a 2% target.

Now we have a lot of inflation, but the question is, can we get (inflation) back to 2% without disrupting the economy? I think we can.”

Bullard’s optimism coincides with the rapid pace of interest rate increases by the Federal Reserve, which are aimed at combating the highest inflation in the United States in 40 years.

Higher rates limit the ability of consumers and businesses to borrow and spend, which can dampen growth and inflation. But it also carries the risk of pushing the economy into deflation.

Consumer prices rose 8.6% in May from a year ago, and the government’s inflation report on Wednesday may show that they are up.

Bullard also said that he currently supports a 0.75 percentage point increase in the Fed’s short-term interest rate at its next meeting later this month. Its price is currently between 1.5% and 1.75%, after rising 0.75 percentage points at its meeting in June, the largest since 1994.

Separately, Esther George, president of the Federal Reserve Bank of Cleveland, sounded a more cautionary note in a speech on Monday, suggesting that a Fed hike could be devastating.

“I certainly sympathize with the view that interest rates need to increase quickly, recognizing that current rates do not match today’s economic landscape,” she said at a labor conference in Lake Ozark, Missouri. “However…policy changes move into the economy with a lag, and big and sudden changes can be upsetting to households and small businesses as they make the necessary adjustments.”

George was the only Fed policymaker to oppose a rate hike in June, out of concern that it was too big.

Just four months after the Fed’s rate hike, George noted, “there is a growing debate about the risks of a recession, and some forecasters are for rate cuts as soon as next year.” She added that these concerns indicate that the Fed is raising interest rates “faster than the economy and markets can adjust to.”

The Fed typically moves rates in quarter-point increments, but Chairman Jerome Powell said the Fed wants to move “quickly” to a level of around 2.5%, which would neither stimulate nor limit growth.

Friday’s government jobs report showed employers added 372,000 jobs, a healthy increase, while the unemployment rate remained at 3.6% for the fourth consecutive month, just above the five-decade low reached just before the pandemic.

The strong numbers contrast with signs of a weakening economy, from declining home sales to lower factory production to slower consumer spending. The economy contracted in the January-March quarter, and real-time data trackers, such as the one held by the Federal Reserve in Atlanta, indicate that it did so again in the April-June quarter.

Two quarters of production contraction will satisfy one basic rule of thumb. But the official definition of a recession, drawn up by the National Bureau of Economic Research, looks at a much wider range of data to determine whether a downturn has occurred.

Bullard said other measures of the economy, such as the broad measure of worker and business incomes, suggest the economy may have expanded in the first six months of this year. Businesses and other employers added 2.7 million jobs during that period, a solid total that reflects an optimistic outlook among businesses.

“It doesn’t look like the US economy has been in a recession for the past two quarters,” Pollard said.

Pollard also disagreed that the economy needed several years of high unemployment to control inflation, a view made clear several weeks ago by former Treasury Secretary Larry Summers.

Unlike the early 1980s, when sharp increases in federal interest rates pushed unemployment above 10%, the Fed now has more credibility as an inflation fighter, Bullard said. As a result, inflationary psychology has not gripped most consumers, as it did at the time, and the central bank will not have to increase interest rates as much.

Other Fed officials have said they support a three-quarter point increase in the Fed rate in July, including Atlanta Fed President Rafael Bostic.

“I am fully in favor of moving 75 basis points,” Bostick said on CNBC Financial Network Friday, using financial jargon for a three-quarter point lift. “The massive momentum in the economy to me suggests that the Fed could implement such an increase and not see much protracted damage to the broader economy.”