“The Committee Is Going To Have To Do More”

Key Takeaways

• Jim Bullard, a voting member of the FOMC, feels that the Fed will have to continue with rate hikes because inflation isn’t cooling off enough.
• Many analysts have pointed to recent inflation data to suggest that the most aggressive rate hike campaign in four decades is working. Other analysts feel that the rate hikes will have to continue well into 2023.
• The FOMC will meet on December 13 and 14 to decide future monetary policy and what moves need to be made to curb inflation.

Some experts feel that the most aggressive rate hike campaign in decades may need to slow down. Others are calling for further hikes to slow down economic growth enough to bring back inflation to reasonable numbers after soaring for far too long.

Who is Jim Bullard?

Jim Bullard, president of the St. Louis Fed, has said that the committee will have to do more to battle inflation. Before we dig deeper into these remarks, it’s important that we discuss who he is. Bullard is the president of the Federal Reserve Bank of St. Louis and a voting member of the rate-setting Federal Open Market Committee (FOMC).

According to the official website of the Federal Reserve, there are 12 members of the FOMC. The FOMC reviews the following topics during their eight yearly meetings:

• Economic and financial conditions.
• The appropriate monetary policy decisions for the economy.
• Assessing risks to the Committee’s long-term goals of price stability and continued economic growth.

The next FOMC meeting will be on December 13 and 14, and another rate hike is expected to be announced. Any comments made by Bullard or any other member of the FOMC are taken seriously because they get a vote in the interest rate decisions that impact the direction of the economy and so many marketplace decisions.

Throughout 2022, many officials from the Fed have made public remarks about rate hikes to warn the public about the possible actions taken in the battle against stubborn inflation numbers.

As we’ve discussed, the Federal Reserve controls monetary policy by setting interest rates for overnight lending among banks, affecting the cost of borrowing money. The rate hikes in 2022 have brought the Fed’s short-term rate to the range of 3.75% to 4%, which is the highest it’s been since 2008.

Bullard suggested that this rate would likely have to continue to increase until it’s in the range of 5% to 7% to successfully manage inflation.

November 17

Jim Bullard made the following remarks to reporters on November 17 about the persistent rate hikes:

“Thus far, the change in the monetary policy stance appears to have had only limited effects on observed inflation, but market pricing suggests disinflation is expected in 2023.”

Bullard continued by saying he felt the current zone for the policy rate wasn’t restrictive enough to slow down economic growth and allow inflation to cool off.

“To attain a sufficiently restrictive level, the policy rate will need to be increased further.”

Bullard’s comments were nothing surprising because other officials from the Fed have expressed similar concerns over persistent inflation. What stuck out about the remarks made by Bullard was that he argued the central bank’s benchmark overnight borrowing rate would have to be at least 5% and possibly closer to 7% to be effective.

Other members have hinted that the rate should rise from its current target range of 3.75% to 4% to around 5%. Bullard’s presentation suggested that the policymakers may not be looking to ease up the hikes in the next few meetings. While Bullard is only one member of the committee, it’s a very real datapoint for all of us.

Bullard didn’t specifically mention if he favored a 50 or 75-basis-point adjustment but said that he would be looking to Federal Reserve Chair Jerome Powell for direction on the topic. Powell has since commented that the rate hikes will likely slow down as soon as this month.

Do other committee members agree with Jim Bullard?

Other members have come forward to share their thoughts on the rate hikes, and there appears to be a united front on the sentiment that rate hikes will have to continue for the foreseeable future.

A comment worth bringing up here is from Kansas City Fed President Esther George, who called for a more measured pace of rate hikes as she expressed concerns over the impact that the policy tightening could have on the economy.

George stated, “As the tightening cycle continues, now is a particularly important time to avoid unduly contributing to financial market volatility, especially as volatility stresses market liquidity with the potential to complicate balance sheet run-off plans.”

While all of the prepared remarks from Fed officials have called for further rate hikes, there remains disagreement over the pace of rate hikes. None of the officials have mentioned what they feel the exact rate hike number for December will be.

Why are rate hikes continuing?

The Fed has a dual mandate of controlling inflation and maximizing employment in the economy. Sometimes to control the prices of goods, they have to raise interest rates to slow down economic growth. The Fed is looking to keep raising the cost of borrowing money until they’re at a level where economic growth and hiring slow, allowing inflation to cool.

As one can imagine, this challenging task will cause plenty of pain. When borrowing money becomes expensive enough that economic growth slows down, some employers will inevitably start laying off staff which will hurt many households.

The most recent data showed that consumer inflation reached 7.7% in October from a year earlier, a figure that was slightly lower than expected. While this number is not really worth celebrating, it indicates that the rate hikes could be working. However, one month’s worth of data isn’t conclusive, and the numbers are nowhere near the 2% target.

Should interest rate hikes continue?

As we wait for the next FOMC meeting in December for an official announcement on rate hikes, it’s worth discussing if there should be further rate hikes.

The recent inflation data has suggested that the inflation rate is slowly cooling down after being stubborn for many months. While the inflation data that came out on November 10 indicated that inflation has slowed down more than analysts had predicted, the all-items index still went up 7.7% for the year ending in October. This is the smallest 12-month increase since the period ending in January of 2022, but there are no guarantees that the data will continue to show positive results.

The harsh reality of this data is that it could easily change and provide a more grim outlook by next month. It’s difficult to assess the exact impact of every rate hike.

The Fed is expected to make a 50 basis-point move after the next meeting on December 13 and 14.

How should you be investing?

With all of the confusion regarding soaring inflation and aggressive rate hikes, this is a turbulent time to invest in the stock market. It can be challenging to figure out how to invest your money as nobody can seem to agree on what’s next for the economy.

All of these frustrating inflation figures have led to rate hikes that have caused stock market sell-offs. The fears of a pending recession have hurt investors as there are concerns over discretionary spending slowing down.

For a simpler approach, you can review Q.ai’s Inflation Kit. Q.ai takes the guesswork out of investing by using artificial intelligence to scour the market for the best investments for all manner of risk tolerances and economic situations. Then, it bundles them up into Investment Kits that make investing more straightforward and strategic.

Better still, you can activate Portfolio Protection at any time to protect your gains and reduce your losses, no matter what industry you invest in.

Bottom Line.

It’s essential to pay attention to what officials are discussing when it comes to interest rates. Creating a soft landing with rate hikes is a challenging task with inherent risks, making the cost of borrowing money more expensive.

When people aren’t making money due to lay-offs or less money on furlough, they have less discretionary income to spend on goods and services, which brings down household spending and drags on the entire economy.

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