Economy, Americas

Fed needs to raise interest rates to 3.5%: Official

'Current policy rate is too low by about 300 basis points,' St. Louis Fed president says

Övünç Kutlu   | 07.04.2022
Fed needs to raise interest rates to 3.5%: Official


The US Federal Reserve needs to raise its benchmark interest rate to 3.5%, St. Louis Fed President James Bullard said Thursday. 

Stressing that inflation is "exceptionally high,” comparable to inflation in 1974 and 1983, he said a calculation recommends substantial increases in the Fed's policy rate.

"One concludes that the current policy rate is too low by about 300 basis points, according to this calculation," he said in a presentation at the University of Missouri.

"However, all is not lost. Modern central banks are more credible than their 1970s counterparts and use forward guidance," he said. "Credible forward guidance means market interest rates have increased substantially in advance of tangible Fed action."

Bullard argued that the Fed is not "behind the curve" for inflation as much as it is presumed, based on forward guidance.

Forward guidance is considered a new monetary policy tool, in which statements by central bank officials are regarded as communication instruments that are utilized to indicate the likely course of monetary policy and the overall state of the economy for the future.

Bullard noted that the US real gross domestic product grew at a 5.5% rate in 2021 and will continue to expand at "a slower but still robust 2.8% pace in 2022," despite a weaker first-quarter reading due to the omicron variant of the coronavirus and the Russia-Ukraine war.

The St. Louis Fed President, who is a member of the Federal Open Market Committee (FOMC) with voting rights this year, was the only FOMC official who advocated a rate hike of 50 basis points on March 16 when the Fed raised rates by 25 basis points.

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