Fed's Bullard: We Need Much Higher Interest Rates

Another bombshell remark dropped from a Federal Reserve official on Thursday. As Wall Street Journal chief economics correspondent Nick Timiraos reported on Twitter, St. Louis Federal Reserve Bank president Jim Bullard gave a presentation on Thursday outlining what he saw as a “sufficiently restrictive level” of the benchmark federal funds rate needed to control inflation.

On the “generous” assumptions side, he thought it needed to be at least 5%. “With less generous” assumptions—higher than 7%.

Remember, the fed funds rate range is currently 3.75% to 4.00%. This could be a significant jump, going well into 2023, leaving months for the full impact to be felt, and, for CRE, an ongoing disaster when it comes to projects being viable, either from the start or at refinancing.

Being a wet blanket can be part of the job of the Fed. William McChesney Martin Jr. a famous Fed chair, is associated with the metaphor that the organization “is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.”

Just the other day there was more doom-and-gloom from various Federal Reserve officials. Kansas City Federal Reserve Bank president Esther George said that getting inflation under control might not be possible without a real recession. Fed governor Christopher Waller noted that even slowing down would still leave room for “several 50-basis-point increases, a pretty aggressive path for policy.”

The Fed has often felt pressure over its policies. Martin found himself targeted by John Kennedy trying to dictate rates—because presidents thinking of reelection frequently like loose monetary policy as it heats up the economy and makes voters feel better about things. Lyndon Johnson famously pushed Martin up against a wall when lobbying for short-term economic outcomes.

But the backlash that’s starting to face the Fed now is different. There are many concerned that the organization is pushing too fast and not giving enough time to see the results of their actions to date.

There’s even research out of the Federal Reserve Bank of San Francisco suggesting that the focus on what the fed funds rate should be fails to take into account the effective results of forward guidance and balance sheet policy.

“The Federal Reserve’s use of forward guidance and balance sheet policy means that monetary policy consists of more than changing the federal funds rate target,” researchers Jason Choi, Taeyoung Doh, Andrew Foerster, and Zinnia Martinez wrote. “A proxy federal funds rate that incorporates data from financial markets can help assess the broader stance of monetary policy. This proxy measure shows that, since late 2021, monetary policy has been substantially tighter than the federal funds rate indicates. Tightening financial conditions are similar to what would be expected if the funds rate had exceeded 5¼% by September 2022.”

Put differently, the country may already be above Bullard’s generous allotment. Many in the Fed have cautioned markets to have patience. Perhaps the agency should take some of its own advice.