Federal Reserve Chairman James Bullard expresses confidence that the economy can make a ‘soft landing’

James Pollard

Olivia Michael | CNBC

Louis Federal Reserve Chairman James Bullard said Tuesday that he still believes the economy can avoid a recession, although he expects the central bank will need to keep raising interest rates to control inflation.

“I think inflation has reached a higher temperature than I had anticipated during the second quarter,” the central bank official said during a speech in New York. “Now that that’s happened, I think we’re going to have to go a little higher than what I said before.”

Bullard estimated that the federal funds rate, the central bank’s benchmark, should rise to 3.75%-4% by the end of 2022. It currently sits at 2.25%-2.5% after four rate increases this year. The rate determines the level that banks charge each other for overnight lending but is fed by various adjustable rate consumer debt instruments.

However, Bullard said the Fed’s credibility in its dedication to fighting inflation would help it avoid a crash.

Bullard compared the current state of the Federal Reserve to the problems faced by central banks in the 1970s and early 1980s. Inflation is now at its highest level since 1981.

He expressed confidence that today’s Fed would not have to drag the economy into recession the way then-President Paul Volcker did in the early 1980s.

“Modern central banks have more credibility than their counterparts in the 1970s,” Pollard said during a speech in New York. “Because of this… the Fed and [European Central Bank] It may be able to expel air in an orderly manner and achieve a relatively soft landing.”

Recently the markets have been making an opposite bet, namely that a hawkish Fed will raise interest rates so much that an economy that has already endured consecutive quarters of negative GDP growth will fall into recession. Government bond yields have been trending lower, and the spread between these yields has been narrowing, which generally indicates that investors are taking a bleak view of future growth.

Indeed, futures pricing suggests that the Fed will have to follow through on its rate increases this year with cuts once the summer of 2023.

But Pollard argued that the Fed’s ability to steer the economy into a soft landing largely depends on its credibility, specifically whether financial markets and the public believe the Fed has the will to stop inflation. He differentiated this from the 1970s when the Federal Reserve decided to raise interest rates when faced with inflation, but it quickly fell back.

“That credibility did not exist in the previous era,” he said. “We have a lot more credibility than we had.”

On Wednesday, Pollard will appear on CNBC’s “Squawk Box” starting at 7:30 a.m. ET.

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