St. Louis Federal Reserve President James Bullard reiterated Thursday that persistently high inflation is straining the central bank’s credibility, according to his prepared presentation.
“The current U.S. macroeconomic situation is straining the Fed’s credibility with respect to” its mandate of bringing inflation down to 2%, Bullard said, adding that expected inflation and actual inflation should be closely related.
While there’s a risk that inflation expectations could become unanchored, 5-year, 5-year forward inflation expectations have been falling since its peak of 2.67% on April 21, standing at 2.10% as of July 6 amid fears of a recession taking hold, according to FRED data.
Still, “the current divergence between actual inflation readings and TIPS-based expected inflation will have to be resolved, possibly resulting in still higher inflation expectations,” Bullard explained.
The Fed has lifted its benchmark lending rate by 175 basis points so far in 2022 and it started balance sheet runoff at the beginning of June, though consumer price inflation (at least on a Y/Y basis) is still hovering around 40 year highs.
Furthermore, the labor market remains “robust,” Bullard said, citing the Kansas City Fed’s labor market conditions index, which is hovering around highs last seen in 1999-2000. In turn, output is expected to keep expanding through 2022, he added.
Previously, (June 24) James Bullard wanted to raise the policy rate to 3.5% by the end of 2022.