On Monday, St. Louis Fed President James Bullard gave a presentation on the economic landscape at the Barcelona School of Economics.
What Bullard expects: Inflation in the United States is comparable to levels seen in the 1970s, and without credible Fed action, the economy would experience higher inflation and volatile economic performance, Bullard said in the presentation.
Due to the uncertainties surrounding the Russian-Ukrainian war and China’s downturns, this has created a storm of inflationary pressures, he said. Fifteen months ago, inflation was below 2%, Bullard said.
The Kansas City Fed Labor Market Index, which combines various measures of labor market performance into a single measure, remains near highs last seen in 1999-2000.
Bullard noted that the U.S. labor market remains robust, with the economy hitting a 3.6% unemployment rate before the pandemic, and production is expected to continue through 2022.
Markets priced in interest rates ahead of Fed action as the Fed started to get hawkish in the second half of 2021, Bullard said.
A discrepancy exists between actual inflation and expected inflation based on TIPS, as expected inflation still remains high, he said.
This could lead to lower or higher inflation, as they are correlated, the St. Louis Fed chairman said, adding that he hopes expected inflation will trend lower.
Arguments for economic expansion: “Indicators indicate that there will be continued expansion in the coming quarters. It won’t be as fast as last year, but last year the US economy grew by 5% in real terms,” Bullard said.
The long-term real potential GDP growth benchmark for 2022-26 is 2%, he said, adding that although the trend line is slowing towards the benchmark, we are still above it.
The last word: With inflation well above the 2% target, Fed policy and credibility will be at the forefront of every meeting.
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