Was Bullard underestimated? Hardline economists say federal funds rate may need to rise to 8%-9%
A day after a Federal Reserve official acknowledged that interest rates may need to go up to 7%, analysts have come to an even more surprising conclusion: That 7% is still not high enough to win the inflation war.
In a presentation made Thursday in Louisville, Ky., Fed President St. Louis James Bullard estimated that 5% to 7% The federal funds rate target is what is needed to move borrowing costs into an area sufficient to slow economic growth and produce a substantial decline in inflation. After those estimates on Thursday, US stocks took a hit for the first time back armor Two-week loss, ICE US Dollar Index
DXY,
Treasuries yield spikesand parts of the Treasury curve show worrisome signs about the economic outlook.
However, investors disregarded Bullard’s view. Bond markets were steady, along with the dollar, early Friday until a second Fed official commented, Susan Collins, triggering a sell-off of government debt in the afternoon. Meanwhile, optimism returns to stocks, with all three major indexes
DIA,
ended higher on Friday. Behind the scenes, some economists applaud Bullard for his honesty, while other analysts say his estimates are not as shocking as investors and traders believe. One of the most underappreciated risks in financial markets is that inflation doesn’t return to 2% fast enough to dampen the need for more aggressive moves by the Fed, traders, regulators, and more. monetary manager and economist told MarketWatch.
Read: Financial markets run with the ‘highest inflation’ narrative again. This is why it’s complicated.
Economists Lindsey Piegza and Lauren Henderson of Stifel, Nicolaus & Co. said it thinks even the 7% federal funds rate could “underestimate” how much the Fed’s base rate may need to rise. Calculations suggest that there may be demand “for federal funds rates potentially 100-200 bps higher than [Bullard’s] suggested upper limit,” they wrote in a note. In other words, the federal funds rate is between 8% and 9%, compared with the current range of 3.75% to 4%.
“Recent improvement in inflationary pressures moving from peak levels in some ways appears to have blinded many investors to the need for the Fed to continue aggressively on its rate hike path,” they said. higher capacity”. “While CPI is up 7.7% year on year [or consumer price index] is an improvement from the previously reported 8.2% annual rate, which is hardly anything to celebrate or is a clear signal for the Fed to move to easier policy with a target range 2% is still a distant achievement.”
Stifel economists also say that Bullard is leaning on historically low neutral interest rates, or theoretical level where Fed policies neither stimulate nor constrain economic growth, as part of his assumptions.
Piegza and Henderson are not alone. In an unsigned note, UniCredit researchers said that while “7% was absolutely shocking” to financial market participants to hear, the idea of the relative fund rate The final state is much higher than most people would expect as “not particularly new”.
As of Friday, federal funds traders mainly expect the Fed’s main policy rate target to be reached between 4.75% and 5% or between 5% and 5.25% in the first half. next year. However, according to UniCredit researchers, standard interpretations of so-called Taylor rule estimates suggest that the federal funds rate should be around 10%. The Taylor rule refers to the generally accepted rule of thumb used to determine how much interest rates should be relative to the current state of the economy.
Some have publicly questioned the estimates of Bullard, a voting member of this year’s Federal Open Market Committee, noting that the policymaker ignored the Fed’s impact. quantitative tightening process from his rate estimate.
Once the QT process is taken into account, the “inner range” of potential outcomes for the federal funds rate “could be closer” to that of the federal funds rate, said economists Alex Pelle and Steven Ricchiuto of Mizuho Securities. 4.5% -4.75% to 6.5% -6.75%. However, the “full range” of reasonable outcomes is even wider and could range anywhere from as low as 3.25% -3.5% “to extremely dovish, in in that case, the Fed has tightened too much” and 8.25%-8.5% “is extremely hawkish, in which case the Fed is only half done.”
Chris Low, chief economist at FHN Financial in New York, called Bullard’s presentation “awesome” because “it’s the most honest attempt to translate public expectations for funds raised.” terminal to a reasonable range that any FOMC participant has come up with to date.”
“Remember, he did his best to avoid shocking the market,” Low said of Bullard. “His zone ranges from moderate to reasonable, not from dovish to hawkish. Our expectations are still being managed. We can’t blame him for that.
