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Bullard: Credibility Of Inflation-Targeting Regime At Risk

FED
  • Bullard ('22 voter) points out various areas that allow the Fed to tighten policy further in the aim of repeating the 1994 cycle. Fed Funds terminal of 4.61% in May'23 has firmed in recent hours but remains off yesterday's US session highs of 4.75%.
  • “Just now after this most recent meeting, the US rate has arguably moved into restrictive territory. But that doesn’t mean were stimulative all the way up to this meeting because the committee benefited from market pricing moving well ahead of actual FOMC moves.”
  • Inflation expectations: The good news is that TIPS-based inflation expectations are below 3% and in ranges that are consistent with inflation returning to 2%. However, markets have often been wrong and we’ve often been wrong so we won’t believe it until we see it.
  • Bullish factors for US: wealth to disposable income ratio is up about 1 GDP from what it was pre-pandemic, so about $25T of extra value that households have even with the equity sell-off in the last nine months or so and the slowdown in the housing market.
  • Cushion of accumulated savings from fiscal response and strong labor market suggests Fed has room to get inflation under control at a relatively fast pace. This should give the Fed a better chance of success than Volcker era, repeating that hopeful Fed outcome can be positive as in 1994 effort, must not replay volatile era of 1970s.
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  • Bullard ('22 voter) points out various areas that allow the Fed to tighten policy further in the aim of repeating the 1994 cycle. Fed Funds terminal of 4.61% in May'23 has firmed in recent hours but remains off yesterday's US session highs of 4.75%.
  • “Just now after this most recent meeting, the US rate has arguably moved into restrictive territory. But that doesn’t mean were stimulative all the way up to this meeting because the committee benefited from market pricing moving well ahead of actual FOMC moves.”
  • Inflation expectations: The good news is that TIPS-based inflation expectations are below 3% and in ranges that are consistent with inflation returning to 2%. However, markets have often been wrong and we’ve often been wrong so we won’t believe it until we see it.
  • Bullish factors for US: wealth to disposable income ratio is up about 1 GDP from what it was pre-pandemic, so about $25T of extra value that households have even with the equity sell-off in the last nine months or so and the slowdown in the housing market.
  • Cushion of accumulated savings from fiscal response and strong labor market suggests Fed has room to get inflation under control at a relatively fast pace. This should give the Fed a better chance of success than Volcker era, repeating that hopeful Fed outcome can be positive as in 1994 effort, must not replay volatile era of 1970s.