Fed’s Bullard Sees 3.5% Rates Setting Up Cuts in 2023 or ‘24

(Bloomberg) — Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

Most Read from Bloomberg

Federal Reserve Bank of St. Louis President James Bullard urged policy makers to raise interest rates to 3.5% this year to bring inflation down from near a four-decade high, adding that some of those hikes could be reversed late next year or in 2024.

Bullard reminded the Economic Club of Memphis on Wednesday that in late 2019, prior to the Covid-19 pandemic, Fed rates were 1.55%, the 10-year Treasury yield was 1.86% and mortgage rates were below 4%.

“This may provide a practical benchmark for where the constellation of rates may settle once inflation comes under control in the U.S.,” he said during the virtual presentation.

Bullard, who has been the most hawkish Fed official this year, has supported Chair Jerome Powell’s plan to raise interest rates by a half-point at the next two meetings. He later told reporters that he currently is looking for another hike of that size in September if data comes in as expected. Yet he also repeated that rates may come back down in 2023 or 2024 once inflation returns to target.

‘Good Plan’

“I think we have a good plan for now,” Bullard told the reporters. “This 50 basis point per meeting increase is twice the normal pace that the committee has used in recent years which shows that there’s a lot of unanimity around expeditiously moving to neutral in this high-inflation environment that we’re in.”

The Federal Open Market Committee raised rates by a half-point last month to cool the hottest inflation in 40 years and officials have signaled they’ll hike by the same amount again at their meetings in June and July. They also began shrinking their massive balance sheet at a monthly pace of $47.5 billion from Wednesday, stepping up to $95 billion in September, in a process also called quantitative tightening.

Bullard said front-loading the rate hikes this year rather than spreading them out over two or more years would allow the Fed to counter inflation, much of which has been caused by fiscal and monetary stimulus as opposed to supply issues related to Covid.

“We want to move as quickly as we can,” he said.

The U.S. economy is already beginning to slow in response to less monetary stimulus, cited in the Beige Book report on regional economic conditions. Bullard told reporters that was expected and welcome. Growth should be expected to slow to a long-term trend rate, of around 1.75-2%, he said.

‘’This doesn’t surprise me,” Bullard said. “I would say overall the anecdotal reports I’ve heard — some of which filtered in to the Beige Book — are consistent with continued growth in the US economy: In certain markets very, very strong. In others more tempered.”

(Updates with comments from media briefing starting in first paragraph.)