Bullard Says Oil Surge Might Make Fed’s Job More Difficult

(Bloomberg) — Federal Reserve Bank of St. Louis President James Bullard said OPEC’s decision to cut output was unexpected and an increase in oil prices could make the Fed’s job of lowering inflation more challenging.

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“This was a surprise,” he said Monday during an interview on Bloomberg Television with Michael McKee. “Whether it will have a lasting impact I think is an open question.”

Bullard does not vote on monetary policy this year.

“Oil prices fluctuate around. It’s hard to track exactly. Some of that might feed into inflation and make our job a little bit more difficult,” he said.

Crude-oil futures advanced sharply after the oil cartel on Sunday announced an output reduction of more than 1 million barrels per day.

While acknowledging the potential importance of the shift, Bullard also said that an increase in oil prices this year was consistent with his economic outlook for more demand for energy.

“I would’ve expected somewhat higher oil prices anyway with China coming back sooner than expected during the first half of 2023 and with Europe skirting recession,” he said. “And strong data in the US, all of those are are pretty bullish factors for the oil market.”

Policymakers raised interest rates by a quarter percentage point last month to a 4.75% to 5% target range, extending their yearlong hiking campaign to quell inflation despite recent turmoil in the banking sector. They also signaled via quarterly forecasts that they expect another increase of that size this year, according to their median projection.

Bullard said last month that his own forecast was for rates to peak at 5.625% this year. Officials next meet May 2-3.

Investors, on the other hand, are betting that the Fed will have cut rates by roughly 50 basis points by the end of 2023, with the recent collapse of Silicon Valley Bank hardening views that the resulting financial-sector strain will tip the US into recession.

But the St. Louis Fed chief said that Wall Street is putting too much emphasis on the idea that banking turmoil will increase and fundamentally alter the economic outlook.

Bullard said he sees an 80% to 85% probability that financial stresses will ease, the economy will continue to grow at a low rate and the labor market will remain tight, with the remaining odds that the turmoil will translate into a worsening economy.

“The problem with Wall Street is they’ve got too much probability on that branch,” Bullard said.

The Fed has adopted a two-pronged strategy that uses macroprudential tools to deal with banking issues, while it continues to deploy monetary policy to try to reduce inflation, Bullard said.

“You can walk and chew gum at the same time,” he said. “You’ve got the macroprudential tools for financial stress and you’ve got monetary policy to fight inflation.”

(Updates with more comment from Bullard in seventh paragraph.)