MNI: Bullard Says Fed Nearing Sufficiently Restrictive Stance

Aggressive Federal Reserve hikes have brought interest rates closer to a “sufficiently restrictive” level that should help bring down inflation, in part because they have helped to lower price expectations, St. Louis President James Bullard said Thursday.

“It now appears that the policy rate will move into the sufficiently restrictive zone during 2023,” Bullard said in prepared remarks. “During 2023, actual inflation will likely follow inflation expectations to a lower level as the real economy normalizes.”

The speed of rate increases last year posed some risks to financial stability, Bullard said, adding that officials’ efforts to clearly communicate their intentions to markets mitigated any such threats.

“The transparency with which these increases have been delivered, along with forward guidance, seems to have allowed for a relatively orderly transition to a higher level of interest rates so far,” Bullard said.

Late last year, Bullard argued a sufficiently restrictive interest rate would fall between 5% and 7%. That upper band was much higher than FOMC forecasts and market expectations, though in line with many former officials’ and staffers’ views that current rate peak predictions are still too sanguine. (See MNI INTERVIEW: Fed Rates To Peak Well Above 5.5%, No Cuts in 2023)

GETTING CLOSER

“The policy rate is not yet in a zone that may be considered sufficiently restrictive, but it is getting closer,” Bullard said.

He was fairly optimistic about the prospect for further declines in inflation this year after a slow but steady dip in the latter half of 2022.

“In part due to front-loaded Fed policy during 2022, market-based measures of inflation expectations are now relatively low,” he said. “These factors may combine to make 2023 a disinflationary year.”