By Geoffrey Smith
Investing.com -- The Federal Reserve still needs a "sharp" tightening of monetary policy to tame inflation and risks a replay of the 1970s if it doesn't act decisively, St. Louis Fed President James Bullard said on Wednesday.
“Our risk now is inflation doesn’t come down and reaccelerates and then what do we do?" Bullard told CNBC's Squawk Box. "We are going to have to react, and if inflation doesn’t start to come down, you know, you risk this replay of the 1970s where you had 15 years and you’re trying to battle the drag, and you don’t want to get into that. Let’s be sharp now, let’s get inflation under control in 2023.”
Bullard said he expects short-term interest rates to peak between 5.25%-5.50%, still over half a percent above their current level, and noted that the recent rise in bond yields showed that an increasing number of market participants shared this view. The latest U.S. economic data, which included a strong employment report for January and higher-than-expected inflation and retail sales numbers, have all strengthened suspicions that the economy is still not coming off the boil as quickly as the Fed would like.
"I just think that we have a very strong labor market, combined with more momentum coming out of the second half of 2022 than we previously thought," Bullard said. "That adds up to markets wanting to price in a tougher road ahead for disinflation in 2023."
"Let’s hope that we get disinflation in 2023, but right now it’s hotter than we thought," he added.
Bullard said he was encouraged by signs of disinflation in the quarterly update from retail giant Walmart (NYSE:WMT) on Tuesday, which noted that customers were increasingly turning to lower-price alternatives to their usual goods. Economists have argued that poorer consumers in particular have now completely run down any savings they had built up during the pandemic thanks to government support measures. As such, companies are no longer able to pass on higher input costs as easily as they could last year.
"Those firms that are too nonchalant about their price increases – they’re going to lose market share, possibly forever, and possibly go out of business," Bullard said.
The Fed is due to release the minutes of its last policy meeting at 14:00 ET (19:00 GMT), which are likely to shed light on how much support there is for Bullard's view.