Geoffrey Smith 

Investing.com — To bring down inflation, the Federal Reserve might need to increase interest rates more than what the market expects. This was stated by James Bullard of St Louis Fed.

Bullard was able to speak in front of Fed staff and assess the gravity of recent inflation increases.

U.S. inflation rose over the winter, reaching its highest point for over 40 years. However, futures on interest rates and other measures of market expectations regarding Fed policy were still forecasting that the central bank would not raise the Fed Fund Rate much higher than 3%. In response to the pandemic the Fed aggressively reduced the target range for fed funds to just over zero and increased its quantitative easing.

It raised the Fed Funds Target Range to 0.25-0.50% in March. This was the first increase since 2019. The minutes from that meeting, released Wednesday, indicated that most people wanted a half point more. However, they were persuaded by uncertainty about the economic outlook due to Russia’s invasion. 

Bullard made it clear that Bullard recognized the Fed could not be so far behind the curve as simple monetary policies would lead to believe. Bullard noted that surveys on inflation expectations did not match the yields of inflation-linked Treasury bonds. He also stated that because the Fed is a credible inflation fighter, long-term bond yields haven’t increased as much as they had in the short term. 

Bullard stated that creditable forward guidance is when market interest rates are significantly higher than before any tangible Fed action. This second definition means that the Fed isn’t as far behind than the curve. But, the Fed must increase the policy rate now to ratify any forward guidance it has previously provided.