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The Fed: Fed’s Bullard wants to get benchmark interest rate up to 3.5% this year

St. Louis Federal Reserve President James Bullard on Thursday dismissed talk of recession, saying that the U.S. expansion “is not ‘old’ and can continue for a long time.”

Real GDP will continue to grow at a slower but still robust 2.8% in 2022, despite a relatively weak first-quarter reading due to the omicron variant and the Russia-Ukraine war, Bullard said, in a talk at the University of Missouri.

“Labor markets are robust and are likely to improve further in 2022,” he said.

In fact, the U.S. unemployment rate will likely fall below 3% later this year, an event that has not occurred since the 1950s, he added.

The St. Louis Fed President is a voting member of the Fed’s interest-rate committee this year. He has been vocal about the need for the Fed to raise interest rates swiftly to counter inflation, saying he wants to get the Fed’s benchmark interest rate above 3% this year.

Bullard’s comments Thursday suggest he thinks the economy can withstand this aggressive tightening of interest rates.

In his talk, Bullard made the case that the Fed wasn’t as far “behind the curve” on inflation as some economists suggest.

In contrast to the last episodes of high inflation in the 1970s, modern central banks make more use of forward guidance. he noted.

This has been a key factor in the recent increase in the 2-year Treasury yield
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2.465%

and the 30-year mortgage rate, he said.

Widely-followed rules for Fed monetary policy, developed by Stanford University economist John Taylor, now suggest that the Fed’s benchmark interest rate should be 3.5%.

While the Fed’s policy rate is much lower – in a range of 0.25% to 0.5%, the yield on the 2-year Treasury note was 2.43% on April 4. This is only 100 basis points shy of the Taylor rule level, Bullard said.

“This suggests the Fed is not as far ‘behind the curve’ although it would still have to raise the policy rate to ratify the forward guidance, he said.

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