The US isn’t in a recession, Jim Bullard told CNBC Wednesday. The labor market, he said, is “so strong.”
Fed officials are engaged in an all-hands-on-deck public relations campaign aimed at achieving three goals. First, they need to underscore their commitment to bringing down inflation. Second, they’re keen to dispense with the notion that the economy is already in a downturn. Third (and this is a largely unspoken goal) they’re anxious to discourage risk assets, and particularly stocks, from extending a recent rally which has helped ease financial conditions at cross purposes with the Committee’s tightening efforts.
Bullard, who, amusingly, was actually on set with Joe Kernen, reiterated his support for front-loading rate hikes, an approach he said “enhances” policymakers’ inflation-fighting credentials. He wants “convincing” evidence that inflation is receding.
As a reminder, there’s no such evidence yet. There are lower commodity prices and favorable readings on PMI price gauges (figure below). And there are comforting declines in measures of inflation expectations, both market-based and consumer-derived. But there’s no hard evidence yet of realized inflation moderating.
“We’re going to have to see convincing evidence across the board of headline and other measures of core inflation all coming down convincingly before we’ll be able to feel like we’re doing enough,” Bullard remarked.
When it comes to forecasting inflation, simple extrapolation may not work. Inflation isn’t a random walk. It trends. That’s due, in part anyway, to psychology and the knock-on effects of expectations across the economy. More worrying, the potential for additional geopolitical shocks and climate “events” may mean never corralling inflation again, where “never” means never.
If that latter point sounds far-fetched or hyperbolic, I’d submit we’re running out of natural resources, we’re not cooperating on the path to sustainable energy (and even if we were, we waited so long that it’s doomed to be a haphazard affair conducive to extreme commodity price volatility) and the longer-term structural factors that kept inflation subdued for four decades were dislodged by the pandemic and the war in Ukraine. Macro volatility may be here to stay.
For his part, Bullard is confident. The Fed, he insisted, will get inflation back to 2% over time. “We’re going to follow the data very carefully and I think we will get it right,” he said, on the way to suggesting the US economy will “have a reasonably good third quarter.”
Again: Officials can “think” whatever they want to think, but it’s possible that “getting it right” may no longer be… well, possible.
As for rates, Bullard said the Fed should get to 3.75% to 4% this year. We’re not “a long way from neutral” anymore (to channel Powell’s infamous communications faux pas), but, as Bullard put it Wednesday, “we’ve still got some ways to go to get to restrictive monetary policy.”