James Bullard, chairman of the Federal Reserve Bank of St. Louis, joined Yahoo Finance to discuss its outlook for inflation and the central bank’s response.
Below is a transcript of his appearance, which aired live on May 11.
BRIAN CHEUNG: I’m here live on Yahoo Finance in an exclusive conversation with St. Louis Fed President James Bullard. Obviously the Federal Reserve is very much the focus, so it’s great to have you on the agenda, Chairman Bullard. How are you?
JAMES BULLARD: All right, thank you for inviting me.
BRIAN CHEUNG: I want to start with a conversation about the inflation numbers we got this morning from the consumer price index. 8.3% on an annual basis in April. What were your takeaways from this report?
JAMES BULLARD: Yeah, I don’t think we want to overemphasize a report, but what I take away is that inflation is broader and more persistent than many thought and the Fed will need to act to keep inflation going under control. And we have a plan in place, which is, you know, 50 basis points at the last meeting and to put that in place for future meetings as well. I think we need to reach a higher level of the policy rate to control especially the persistent part of the inflation process.
BRIAN CHEUNG: Chairman Bullard, I had the luxury of speaking with your colleagues in Atlanta and also in Cleveland yesterday. Both say that before we got this inflationary impression, to be fair, they were pushing for 50 basis points at least in the next two meetings. What do you think would be the appropriate political path in the future?
JAMES BULLARD: Yeah, I think that’s a good reference for now. And, you know, I think we’re in – it’s a good plan right now. I think we have to go above neutrality by the end of the year. I advocated just as a kind of number to publish, a target of 3.5% on the key rate by the end of the year. I think we’re going to have to do more than just go neutral. We will have to go above neutrality to exert downward pressure on the persistent component of this inflation. So I think the most important thing here is that you should probably take the big inflation number we got today, over 8%, part of which has a transitory component. I know we banned the word transitional. But some of that will go away naturally. And it’s very good and everything is going well for us. But there’s a lot of it that’s not in that category, it’s much more persistent. And it is this kind of inflation that requires Fed action. And for us to put downward pressure on inflation, we’re going to have to raise the policy rate to a range where we can exert some leverage and bring inflation down. We are all in the middle of this process right now. But that’s what I hold for the current position.
BRIAN CHEUNG: Could a 75 basis point move be justified in your view? I know your remarks about the possibility of this happening ahead of May’s FOMC have sparked market interest. Do you see this as a basic need, at least in future meetings?
JAMES BULLARD: That’s not my base case. So I think we have a good plan in place and that the committee, based on public comments from my colleagues anyway, has coalesced around a plan of 50 basis points per meeting. So I think we can continue on that. This report was hot in terms of inflation, but not that different from what was expected in this report. So it’s not like we have a huge amount of information here. Although I would interpret it to mean that inflation is broader and more persistent than many thought.
BRIAN CHEUNG: So if you want to hit 3.5% by the end of this year, that might be a little faster pace than your colleagues. So would that imply 50 basis points for every meeting throughout the end of this year? How would you like to get there?
JAMES BULLARD: Yeah, I mean, I think it’s more state dependent than that. So we want to go one meeting at a time. Let’s see how the data arrives. It is possible that inflation will moderate a lot. It is possible that the real economy will take some twists and turns. And so I don’t think we want to promise today what we’re going to do in December. But I think right now I think we’re on a good short-term track and then we can adjust as we go.
BRIAN CHEUNG: So you gave a speech recently, in which you noted that the Fed has a little more leeway to tighten if it has credible forward guidance, which implies that markets should read [and] understand exactly what the Fed is doing. We see volatility happening right now. And there’s also the big picture of whether the Fed is already a bit too late for inflation here. What do you see as, I guess, auditing the credibility of the Fed right now?
JAMES BULLARD: Yeah, gave the talk at Stanford last Friday. You know, I want to stress this point: it looks like we moved the policy rate a bit, as we only made one move in March and then 50 basis points last week. But in reality, we have done much more than that. As you know, based on market monitoring, the two-year Treasury is up significantly from where it was six to nine months ago. And it’s really the two-year Treasury that indicates where the market thinks the policy is going to go. So, taking a hawkish turn last year, we’ve already implemented some of the restraint policy even as I speak here. And so that’s going to help us a lot to keep inflation under control. I don’t think we’ve come this far. But we’ve gotten off to a good start, and we’re going to quickly raise the policy rate higher as we move forward here. We’re, you know, I’m sensitive to being disruptive in financial markets. But here, I think we’ve been very transparent about our policy. We have tried to communicate in advance what we plan to do – as best we can, given the information coming to us on the economy. And this is a rapidly changing situation. But we try to be as transparent as possible. You’re right: it’s causing volatility right now. People are not waiting for the policy rate to move up into the 2.5% range, all the effects are happening right now. So this is the effect of forward orientation.
BRIAN CHEUNG: We’re seeing markets right now, you know, very volatile. The trading session has been very difficult the past few days for investors. Do you see recession risks flashing through the financial markets? And is it possibly going to be a Fed-induced recession as you squeeze?
JAMES BULLARD: Yeah, I don’t think the risk of a recession is that high right now for the US economy. Of course, you still face the possibility of a big shock happening. And it happened. And you know, obviously the pandemic was like that, even the global financial crisis. So you have those kinds of possibilities. But I would say that our probability of a recession is not particularly high right now. And if you look at models that try to predict, you know, recession or give you recession probabilities, they’re still pretty weak. There is a wide variety of models. You could probably find one that would tell you that the likelihood of a recession is high. But I don’t think so at the moment. You have this very strong job market, for example, which is not at all like the kind of thing you would see if you slipped into recession.
BRIAN CHEUNG: Yes, the unemployment rate at 3.6%. Still very low. Finally, I wanted to ask a question about financial stability. The Fed had this Financial Stability Report this week, detailing the risks of stablecoins. And I bring this up because the volatility we’ve seen in the markets has led to a lot of madness in one specific stablecoin: Luna and Terra, which were supposed to hold a $1 peg. We see that he did not hold this level. I don’t know if you’ve read the headlines about it. But do you have any thoughts on the stablecoin space and whether or not it might pose a risk to the financial stability of the economy right now?
JAMES BULLARD: You know, I watch this from afar, but I know people have commented on the financial stability risks associated with stablecoins. To me, they look like fixed exchange rate systems. And historically, fixed exchange rate systems have not worked very well. And so they are likely to be attacked or lose confidence. And apparently that’s what’s happening here in this particular market, but I’m a bit far off I admit.
BRIAN CHEUNG: Okay, but you don’t think what’s going on with Terra/Luna is systemic?
JAMES BULLARD: It doesn’t seem systemic to me right now. However, I would say this is the kind of thing that validates those who have said stablecoins may pose a risk to financial stability.
BRIAN CHEUNG: Okay, well, a big conversation right there. Joining us here on Yahoo Finance is St. Louis Fed President James Bullard. Thanks again for taking the time. Have a good Wednesday.
JAMES BULLARD: Perfect, thank you.