Solid US economy can handle rising interest rates, says Fed's Bullard

The US economy is healthy and shows little sign of an imminent recession, and can withstand higher interest rates, St Louis Federal Reserve president James Bullard said Monday.

Financial markets are flashing signs that an economic downturn could arrive sometime next year, as Americans grapple with the highest inflation in four decades and the Federal Reserve pushes borrowing costs higher. But Bullard said in an interview with The Associated Press that the central bank wouldn't have to drive the economy into a recession or significantly raise unemployment to bring inflation down to its 2% target.

Now we have lots of inflation, but the question is, can we get (inflation) back to 2% without disrupting the economy? I think we can," he said.

 

Bullard's optimism coincides with a rapid pace of interest rate increases by the Fed, intended to combat the highest U.S. inflation in 40 years.

Higher rates limit the ability of consumers and businesses to borrow and spend, which can cool growth and inflation. But they also carry the risk of tipping the economy into a downturn.

Consumer prices rose 8.6% in May compared with a year ago, and a government inflation report Wednesday could show that they've ticked higher.

Bullard also said he currently supports a 0.75 percentage point increase in the Fed's benchmark short-term interest rate at its next meeting later this month. Its rate is currently in a range of 1.5% to 1.75%, after a 0.75 percentage point hike at its June meeting, the largest since 1994.

Separately, Esther George, president of the Federal Reserve Bank of Cleveland, sounded a more cautionary note in a speech Monday, in which she suggested the Fed's large rate hikes could prove disruptive.

I'm certainly sympathetic to the view that interest rates need to increase rapidly, recognizing that current rates are out of sync with today's economic landscape, she said, addressing a labor conference in Lake Ozark, Missouri. However ... policy changes transmit to the economy with a lag, and significant and abrupt changes can be unsettling to households and small businesses as they make necessary adjustments.

George was the only Fed policymaker to dissent from the Fed's June rate hike, out of concern that it was too large.

George noted after just four months of Fed rate hikes, there is growing discussion of recession risk, and some forecasts are predicting interest rate cuts as soon as next year. Those concerns suggest the Fed is lifting interest rates more quickly than the economy and markets can adjust, she added.

The Fed typically moves rates in quarter-point increments, but Chair Jerome Powell has said the Fed wants to move expeditiously to a level of about 2.5%, which would neither stimulate nor restrain growth.

On Friday, the government's jobs report showed employers added 372,000 jobs, a healthy increase, while the unemployment rate remained at 3.6% for the fourth consecutive month, slightly above the five-decade low reached just before the pandemic.