As for the chances of not ruining the economy and of a smooth, or soft, landing, St. Louis Fed President James Bullard was quoted as saying We have a good chance.
The markets seem to be predicting the opposite will happen- namely, a bullish economy will take an economic nosedive due to a steep hike in interest rates.
The St. Louis Federal Reserve president, James Bullard, still believes that the economy can avoid a recession, even though he expects the central bank to keep raising rates.
In my view, inflation has been hotter than expected in the second quarter, the governor of the central bank said in a speech in New York. “Now that that has happened, I think we’re going to have to set the bar a little higher.”
The fed funds rate, which is the base rate determined by the central bank, is expected to have to reach 3.75%-4% by the end of 2022, Bullard estimated, at 2.25%-2.5% it sits following four rate hikes this year. Many adjustable-rate consumer debt instruments are based on the rate set by banks when lending to each other overnight.
Nonetheless, Bullard believes the Fed’s credible dedication to inflation fighting will help it avoid collapsing the economy.
The Fed’s current situation is akin to what central banks faced in the 1970s and early 1980s, when inflation was at its highest.
He confidently predicts that the Fed will not have to drive the economy into a recession the way former Chairman Paul Volcker did in the early 1980s.
Central banks today have more credibility than their counterparts had in the 1970s, Bullard noted during a recent speech in New York. because of this, the Fed and the [European Central Bank] may achieve an orderly disinflation and a relatively soft landing.”
A hawkish Fed has been making the opposite bet, that it will hike rates so much that an economy that has already slipped into recession for consecutive quarters will go into one even more. A downward trend in government bond yields and a compression in the spread between those yields are usually indicators that investors are uncertain about the future.
The Fed will be forced to cut rates as soon as the summer of 2023 if it continues to increase rates this year.
But Bullard argued that the Fed’s ability to steer the economy toward a soft landing would largely depend on its credibility, and in particular whether the financial markets and the public believe that the Fed has the will to stop inflation.
