St. Louis Fed President James Bullard says the US economy is proving more resilient than the central bank thought.
Bullard says strong labor market data has caused investors to prepare for further tightening.
Still, Bullard forecasts that the US has “a good shot at beating inflation” this year.
St. Louis Federal Reserve President James Bullard says the US economy is more resilient than the central bank once thought, repeating his call for more aggressive interest rate hikes to combat persistently high inflation.
The labor market has remained surprisingly resilient in the face of rising borrowing costs, Bullard says, with the unemployment rate tumbling to a 50-year-low as job gains crushed estimates last month.
Bullard says markets are reacting to this “blowout” data, which indicates that US economic growth has not slowed enough to pull back on rate hikes.
Equity markets saw a steep sell-off on Tuesday, with the Dow Jones Industrial Average erasing nearly all of its 2023 gains. US treasury yields rose on signs that the economy remains strong despite nearly a year of monetary policy tightening, setting the stage for higher interest rates over the course of this year.
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“You have a very strong labor market combined with more momentum coming out of the second half of 2022 than we previously thought,” Bullard told CNBC’s ‘Squawk Box’ on Wednesday. “That adds up to markets wanting to price in a tougher road ahead for inflation and disinflation in 2023.”
Bullard added: “I think that’s basically the repricing that’s going on right here.”
Traders seemed optimistic that high inflation and more rate hike were in the rearview as tech stocks rallied earlier this year. The tech-heavy Nasdaq is still up 11% year-to-date after yesterday’s nosedive.
Still, the central bank official says he thinks the US still has “a good shot at beating inflation in 2023” without creating a recession. However, Bullard advocated for stepping up the pace of rate hikes so this can happen, bringing the federal funds rate to 5.375% in order to bring inflation closer to the 2% target.
“If inflation continues to come down, I think we’ll be fine,” Bullard said. “Our risk now is inflation doesn’t come down and reaccelerates, and then what do you do?”
Bullard added: “We are going to have to react, and if inflation doesn’t start to come down, you know, you risk this replay of the 1970s … and you don’t want to get into that. Let’s be sharp now, let’s get inflation under control in 2023.”