“The inflationary impulse is more intense than we were expecting,” St. Louis Fed’s Bullard. “There is some upside risk to that. You’ve got more reopening to occur in the second half of the year.”
Well, Bullard is tied with Minneapolis Fed’s Neel Kashkari as the most dovish FOMC participants. Yes, even more dovish than uber-dove Charles Evans of the Chicago Fed.
But as Bullard mentioned to CNBC’s Becky Quick, the economy is red hot. The Atlanta Fed GDP forecast for Q2 is growing at 10.275%. And core PCE (The Fed’s preferred measure of inflation) is at 3.06% YoY.
So why isn’t The Fed slowing things down? According to Fed Funds Futures, only 1 rate hike is anticipated by Q1 2023.
If we look at the Taylor Rule (Rudebusch model), we can see that the model suggests an increase in The Fed Funds Target rate of 5.33, a whopping 508 basis points above the current target rate of 25 basis points.
Of course, the largest asset in most households’ portfolio is their house. Home prices are growing at 13.2% YoY.
So is Bullard saying that all Biden’s stimulus will produce inflation, but only for a year? Then back to sub-2%?
“It may be appropriate for the Federal Reserve to begin raising interest rates next year given a forecast for inflation above the U.S. central bank’s 2% target,” St. Louis Fed President James Bullard said.
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