The US economy is healthy and showing some signs of an impending recession, and can handle higher interest rates, St. Louis Federal Reserve Chairman James Bullard said on Monday.
Financial markets are indicating that an economic downturn may hit next year, as Americans grapple with the worst inflation in four decades and the Federal Reserve hikes borrowing costs higher. But Bullard said in an interview with the Associated Press that the central bank would not need to push the economy into recession or dramatically increase unemployment to bring inflation back to its 2% target.
Now we have very high inflation, but the question is, can we bring (inflation) down to 2% without disrupting the economy? I think we can,” he said.
Bullard’s optimism coincides with a sharp increase in interest rates by the Fed, which aims to tackle the highest US inflation in 40 years.
Higher rates limit the ability of consumers and businesses to borrow and spend, which can stymie growth and inflation. But they also run the risk of driving the economy into recession.
Consumer prices rose 8.6% in May from a year earlier, and a government inflation report on Wednesday could show they rose.
Bullard also said he currently supports a 0.75 percent increase in the Fed’s benchmark short-term interest rate at its next meeting later this month. After rising 0.75 percentage points at the June meeting, its rate is currently in the range of 1.5% to 1.75%, the biggest since 1994.
Separately, Federal Reserve Bank of Cleveland President Esther George sounded more cautious in a speech on Monday in which she suggested the Fed’s sharp rate hike could prove disruptive.
I certainly support the idea that interest rates need to be raised rapidly, believing that current rates are out of sync with the current economic landscape, he said at a labor conference in Lake Ozark, Missouri. However… policy changes are transmitted with a lag in the economy, and large, sudden changes can be distressing for families and small businesses as they make necessary adjustments.
George was the only Fed policy maker to oppose the Fed’s rate hike in June, fearing it was too big.
George said after just four months of Fed rate hikes, there is growing talk of recession risk and some forecasts call for interest rate cuts early next year. He said those concerns suggest the Fed is raising interest rates faster than the economy and markets can’t adjust.
The Fed usually raises rates in quarter-point increments, but Chairman Jerome Powell said the Fed wants to move quickly to a level of around 2.5%, which will not boost or reduce growth.
The government jobs report on Friday showed employers added 372,000 jobs, a healthy increase, while the unemployment rate stood at 3.6% for the fourth straight month, slightly above the trough. Reached five decades just before the pandemic.
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