Fed's Bullard on rate hikes: 50 basis points ‘a good benchmark for now’

Federal Reserve Bank of St. Louis President James Bullard sits down with Yahoo Finance Live to address efforts to contain inflation, Fed interest rate hikes, the outlook of future monetary policy, recession worries, and stablecoins.

Video Transcript

SEANA SMITH: Well, the focus here for investors has been on the Fed, has been on inflation. And our very own Brian Cheung is here with another exclusive interview. Brian?

BRIAN CHEUNG: Thanks so much, Seana. I am joined here live on Yahoo Finance in an exclusive conversation with St Louis Fed President James Bullard. Obviously, the Federal Reserve very much in-focus. So it's great to have you on the program this afternoon, President Bullard. How are you?

JAMES BULLARD: Very good. Thanks for having me.

BRIAN CHEUNG: So I want to kick things off with the conversation about the inflationary numbers that we got this morning from the consumer price index. 8.3% on a year over year basis in April. What were your broad takeaways from that report?

JAMES BULLARD: Yeah, I don't think we want to emphasize one report too much. But my takeaway is that inflation is broader and more persistent than many have thought and that the Fed will have to act in order to keep inflation under control. And we've got a plan in place, which is 50 basis points at the last meeting and teeing that up for future meetings as well. I do think we need to get to a higher level at the policy rate to control especially the persistent part of the inflation process.

BRIAN CHEUNG: President Bullard, I had the luxury of speaking with your colleagues in Atlanta and also Cleveland yesterday, both of them saying, before we got this inflationary print, to be fair, they were advocating for 50 basis points in at least the next two meetings. What do you see as the appropriate path of policy in the future?

JAMES BULLARD: Yeah, I think that's a good benchmark for now. And I think it's a good plan right now. I do think we need to get above neutral by the end of the year. I've been advocating, just as a kind of number to put out there or a goal, of 3 and 1/2 percent on the policy rate by the end of the year.

I think we're going to have to do more than just get to neutral. We're going to have to go above neutral in order to put downward pressure on the persistent component of this inflation. So I think the biggest thing here is that you should probably take the big inflation number that we got today, 8-plus percent, some of that has a transitory component to it.

I know we've banned the word transitory. But part of that is going to go away naturally. And that's fine and all good for us. But there's a big chunk of it that's not in that category and is much more persistent. It's that kind of inflation that requires Fed action. And in order to get us to be able to put downward pressure on inflation, we're going to have to get the policy rate up in a range where we can put some leverage on this and move inflation down.

So we're all in the middle of this process right now. But that's my takeaway for the current position.

BRIAN CHEUNG: Could a 75 basis-point move be warranted in your view? I know your remarks on the possibility of that prior to the May FOMC got markets very interested. Do you see that as a baseline need, at least in the next few meetings?

JAMES BULLARD: That's not my base case. So I think we've got a good plan in place. And the committee, based on public comments anyway from my colleagues, has coalesced around a plan of 50 basis points per meeting. So I think we can proceed on that.

This report was hot in terms of inflation but not that different from what was expected coming into this report. So it's not like we got a tremendous amount of information here, although I would interpret it as indicating that inflation is broader and more persistent than many have thought.

BRIAN CHEUNG: So if you do want to get to 3.5% by the end of this year, that might be a bit of a 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 stay contingent in this. So we want to take it one meeting at a time. Let's see how the data comes in. It's possible inflation could moderate a lot. It's possible the real economy could take twists and turns. And so I don't think we want to be promising today what we're going to do in December. But I think right now, I think we're on a good path near-term and that we can adjust as we go along.

BRIAN CHEUNG: So you made a speech recently where you noted that the Fed has a little bit more room on tightening if it has credible forward guidance, which implies that markets would have to read, understand exactly what it is the Fed's doing. We see the volatility happening right now. And there's also the bigger picture about whether or not the Fed is already a bit too late to inflation here. What do you see as the, I guess, audit right now of Fed credibility?

JAMES BULLARD: Yeah. I gave the talk at Stanford last Friday. And I do want to press on this point that it looks like we've only moved the policy rate a little bit because we've just made the one move in March and then 50 basis points last week. But actually, we've done far more than that, as you know, from tracking the markets.

The two-year Treasury has moved up substantially from where it was six to nine months ago. And it's really the two-year Treasury that's indicative of where the market thinks policy is going to go. So by taking a hawkish turn last year, we've already put some of the policy restraint in place even as I speak here.

And so that's going to help us a lot and keep inflation under control. I don't think we're all the way there. But we made a good start. And we're going to get the policy rate up to a higher level expeditiously as we go forward here.

I am sensitive to being disruptive in financial markets. But here, I think, we've been very transparent about our policy. We've tried to communicate ahead of time what we're planning to do as best we can, given the information that comes in about the economy. And it is a fast-moving situation. But we're trying to be as transparent as we can.

You're right. It's causing volatility right now. People are not waiting for the policy rate to get up in the 2 and 1/2 percent range and that all the effects are occurring right now. So that's the effect of forward guidance.

BRIAN CHEUNG: We're seeing markets right now very volatile. It's been a very rough trading session in the past few days for investors. Do you see recession risks flashing in the financial markets? And is that going to be perhaps a Fed-induced recession as you tighten?

JAMES BULLARD: Yeah, I don't think recession risk is that high right now for the US economy. Of course, you always face the possibility that a big shock will hit. And that has happened. And obviously, the pandemic was like that, even the global financial crisis. So you do have these kinds of possibilities.

But I would say that our probability of recession is not particularly elevated at this time. And if you look at models that try to predict a recession or give you recession probabilities, they're still pretty low. There are a wide variety of models. So you could probably find one that will tell you that recession probability is elevated. But I don't think so right now. You've got this very strong jobs market, for instance, which doesn't at all look like the kind of thing that you'd see if you're sliding into a recession.

BRIAN CHEUNG: Yeah, unemployment rate at 3.6%, still very low. I wanted to ask, kind of lastly here, about financial stability. The Fed had a financial stability report this week detailing the risks of stablecoins. And I bring this up because the volatility that we've seen in markets has led to a lot of craziness in one specific stablecoin, Luna and Terra, which was supposed to be maintaining a dollar peg. We see it has not held that level.

I don't know if you've been reading up on the headlines on that front. But do you have any thoughts on the stablecoin space and whether or not that could pose perhaps a financial stability risk to the economy at this time?

JAMES BULLARD: I'm observing this from a distance. But I know people have been commenting on the financial stability risks associated with stablecoins. To me, they look like fixed exchange rate systems. And fixed exchange rate systems historically have not worked all that well. And so they're susceptible to attack or to loss of confidence.

And apparently, that's what's happening here in this particular market but I'm a little distant from it, I admit.

BRIAN CHEUNG: I mean, you don't think it's systemic, what's happening with Terra and Luna?

JAMES BULLARD: It doesn't look systemic to me at this time. However, I would say that this is the kind of thing that is validating to those who have said that stablecoins maybe do present some financial stability risk.

BRIAN CHEUNG: All right. Well, wide-ranging conversation right there. St. Louis Fed President James Bullard joining us here on Yahoo Finance. Thanks again for taking the time. Have a great Wednesday.

JAMES BULLARD: Great thank you.