President James Bullard of the St. Louis Federal Reserve said Tuesday that he believes the economy can avoid a recession. However, he expects the central bank to maintain its rate hikes to keep inflation in check. “I think that inflation has come in hotter than what I would have expected during the second quarter,” the central bank official said during a speech in New York. “Now that that has happened, I think we’re going to have to go a little bit higher than what I said before.” According to Bullard, the federal funds rate, which is the central bank’s benchmark, will likely need to rise to 3.75%-4% by the end of 2022. It currently sits at 2.25%-2.5% following four rate hikes this year. The rate sets the level banks charge each other for overnight lending but feeds through to many adjustable-rate consumer debt instruments. Bullard believes that the Fed’s credibility in fighting inflation will keep the economy from tanking. Bullard compared the Fed’s current situation to central banks’ problems in the 1970s and early 1980s. Currently, inflation is at its highest level since 1981.
According to him, the Federal Reserve today will not have to drag the economy into a recession as it did under then-Chairman Paul Volcker in the early 1980s. Recently, markets have been betting on the opposite outcome, namely that a hawkish Federal Reserve will raise rates so much that an economy that has endured consecutive quarters of negative GDP growth will enter a recession. The government bond yields have been trending lower, and the spread between these yields has been narrowing, typically a sign that investors are pessimistic about future growth. Based on futures pricing, the Fed may need to follow its rate increases this year with rate cuts as soon as the summer of 2023.