Fmr. St. Louis Fed Chief Bullard: Three Rate Cuts This Year Is 'Base Case'

Here Powell keeps saying that rates are restrictive enough, yet data comes in hot, continues to be hot and core CPI is likely to remain very sticky. So how many cuts we’ve gone from 7:00 to 3:00 are we look likely to go to two. I think at this point, you should probably take the committee and the chair at face value. I think their best guess right now is still 3 cuts this year. And of course, the data can go one way or another, but that’s the base case. I think it’s been a very successful policy. The policy rate was increased a lot during 2022 and inflation fell quite a bit in the second-half of 2023. Last year at this time, core PC inflation would have been 200 basis points higher than it is right now. That’s the committee’s favorite measure. So you’re looking at a very successful policy with a pretty strong economy. So a lot of things going right for the Fed right now. So Powell has been right so far. Yeah, I think he’s been right so far. And the committee’s been right so far to pursue an aggressive strategy to bring inflation back to target. Most of that was in 2022, and then you bore the fruit in 2023 and into 2024. Here we talked about how the Fed is data dependent. Powell himself says he is data dependent. What exactly does that mean and which data in particular is he looking at should be looking at? I think right now I think it’s mostly the inflation data because on the real side of the economy, things are going very well and you can argue about why, but they’re going very well. The committee doesn’t really have to worry about that side of the mandate right now all they’ve got to worry about is getting inflation back to the 2% target, and they’ve come a long ways. Back already was 4.8%, now 2.8% core PC inflation on a 12 month basis. That means you’ve only got 8 tenths of 1% to go. And some people are saying that the next report will lead to core PC being only 2.6% on a 12 month basis. So you’re starting to get close enough. I think you have enough data in hand right now to justify the first rate cut. Maybe not a whole string of rate cuts, but you could certainly justify the first rate cut. Now based on the data that they have, We talked about how the US economy is very strong. So would you say that the risk in the US economy right now is inflation and not growth? Fair to say that that’s. I think that’s right. Yeah. Why is the US economy so resilient? I mean, not too long ago we were expecting a recession 100% or you know priced in of a recession. Yet here we are with a very resilient economy. Yeah, last year at this time you had the bank failure of Silicon Valley Bank and other banks, smaller banks around the country that was over interpreted to mean that the US was going into recession. I don’t think it was ever a good story to tell because yes, they’re they’re their banks failed, but they’re only a small fragment of the total banking and the total intermediation sector in the US economy. So I think that card was overplayed and not only did the US not go into recession in the second-half of 2023, but the economy actually boomed in the second-half of 2023. So you really got a very strong outcome and that has continued into the first part of 2024 here. Although I would say we’re we’re going to be closer to the trend growth rate now not not way above trend the way we were during the last six months of 2023. Some people talk about the US economy being a two track economy. What’s the risk in that? What do you mean by two track, like there’s some parts of the economy that’s actually very weak. Yeah, I think that’s always the case. Probably in any any really big economy there are always some things that aren’t going so well or some markets where there are problems. But I think that it’s very encouraging that the overall picture is very strong for the US mutual rate, of course that is the big question. Some say, well, the Fed says it’s 2.6%, but we have the likes of, I can’t recall his name now, but you know, indicating that it is 6% all above. Larry Summers, for instance says that, yeah, the committee’s number is 2.6. I think that’s going to be ratcheted up here, but it wouldn’t go above 3 or 3 1/2. So the policy rate right now is the top end of the policy range is 5 1/2. So that would take quite a bit to get it down to 3 1/2. And you know, you think that’s eight A rate cuts at 25 basis points a meeting. That would take quite a while. This takes a whole year. One of the things I’m concerned about is that if they don’t get started soon enough, then everything else will have converged and you’ll be at the soft landing, but the policy rate will still be too high. And I don’t think they want to be in that situation because that would risk overshooting on the inflation target and having inflation go below target or risking more recession than than you want to take on. So I think it is an art form to get this to the right level at the right time. Europe is looking, I think it’s very instructive. Europe right now is already projecting that they’ll overshoot the inflation target and be have inflation below target in 2025. You talk about the risk of the fat possibly being behind target, behind the curve, so to speak. How do you assess that risk that it may be behind the curve? Yeah, I don’t think that this has really come into view yet because things are going so well. So it’s a good problem to have. The economy is doing well, inflation is coming down. But if you don’t pay attention to everything that could happen, you might weigh the probabilities a little bit off. So it’s maybe a minor problem to have, but it’s something to keep an eye on in the months ahead. Should the fat taper off its balance sheet run off? Yeah, I I think the, the committee has had a quantitative tightening policy since 20 spring of 2022, implemented in the fall of 2022. I think they’re going to slow that down based on comments at the last meeting. But it will still be a quantitative tightening policy, just not quite as fast as it was. And I I think that’s perfectly fine. I think it’s it makes sense to shrink the balance sheet. It doesn’t make sense. If it does, it does make sense. It does make sense. How much further than, Well, I think they want to get the level of reserves to be the right level for the current economy and they they think they’re too high right now, but I I think they’re moving in the right direction. This doesn’t seem to be impacting other parts of the policy. So I think they’ve got the right plan here. Of course we have the US election at the end of the year. How might that factor into fat thinking and shape what it does. So I don’t think it it really factors into monetary policy, at least not ordinary monetary policy. And I don’t think you can win an election based on what the central bank does in September or August or I don’t think so. I don’t think the typical voter, the median voter doesn’t look at that and doesn’t really know anything about that. So for US politics, it’s a lot about cultural issues. Just one final question, Jim Trump, two point O what might that mean for the US economy? It sounds like he’ll be ever aggressive on trade as he has been in the past, although I would say the Biden administration picked up a lot of the Trump type policies. And so from a trade perspective, it may not be all that different and than it was under Biden. James Villotti, thank you so much for your insights.