St. Louis Fed Pres. Bullard Lets the Cat Out of the Bag: The Fed Doesn’t Have the Stomach for an Inflation Fight

St. Louis Federal Reserve President James Bullard unwittingly let the cat out of the bag and revealed the central bank doesn’t have the stomach to do what’s necessary to take on surging, persistent inflation.

After January’s CPI data came in even hotter than expected, Bullard shocked markets by calling for a full 1% rate hike by July. As CNBC reported, his comments sent stocks “on a wild ride” as futures markets began to price in as many as seven quarter-point rate hikes in 2022. That would push interest rates to 1.75% by the end of the year.

But just a day later, Bullard appeared on CNBC’s Squawk Box and did damage control. He didn’t back off his call for a 1% hike by this summer, but he did walk back his hawkishness, describing it as “front-loading” the Fed’s planned tightening.

I do think we need to front-load more of our planned removal of accommodation than we would have previously. We’ve been surprised to the upside on inflation. This is a lot of inflation.”

Bullard described his comments as “shading up” his position, and he emphasized he’s just one person on the committee.

Most significantly, Bullard insisted the Fed will continue to provide “accommodative” monetary policy.

We’re only removing accommodation, so it’s still an accommodative policy as we go through these initial rate hikes. They’re rather cheap actually.”

In other words, despite “a lot of inflation,” the Fed’s plan is to continue creating inflation with an accommodative monetary policy. Or to put it another way, the central bank will continue to pour gas on the inflationary fire.

Bullard’s damage control underscores the painful reality the Fed finds itself in. As economist André Marques put it, the Fed is trapped. It doesn’t really have room to raise rates or taper.

The Fed is trapped in its own web. It does not have much room to raise rates without major complications in the financial market and in the economy. Even if it finally delivers on tapering and starts raising rates, it won’t get any further than it did back in the last rate hike (2015–18) and balance sheet shrinking (2017–19) cycles.”

This is why Bullard emphasized the central bank can raise rates to address inflation, but “we can do it in a way that’s organized and not disruptive to markets.”

The freakout in the markets after Bullard’s initial statement on rate hikes is exactly why the St. Louis Fed president went on CNBC to do damage control and walk back his comments. Because deep down everybody knows any significant rate hikes will pop this bubble economy built on artificially low interest rates and monetary stimulus.

The reality is hiking interest rates 1 or 2 percent over the next year or two is not a tight monetary policy and it will do little nothing to get ahead of the inflation curve. Peter Schiff made this point in a recent interview on Fox Business. Keep in mind, Paul Volker had to raise rates to 20% in the early 1980s to tame the inflation of the 1970s. Inflation is every bit as high today if measured honestly.

If we still measured inflation the way we did 40 years ago, it would be 15%, not 7.5%. And the rate hikes they’ve proposed are completely inadequate. In fact, the Fed is intending to pursue an accommodative monetary policy. Even if they raise interest rates to 1 or 2%, that is highly accommodative. That’s the same type of interest rates they had when inflation was below 2%. You’ve got inflation at 7.5%, even the way they measure it – and rising. The only way to put out this fire is to have positive real interest rates. The Fed needs to get above the inflation rate. We’re not even going to get close. So, they’re going to continue to pour gasoline on the fire. And so, the entire time the Fed is inching up rates, inflation is actually going to be moving higher. Inflation is going to be worse in 2022 than it was in 2021, and real interest rates are going to continue to fall even as the Fed raises nominal rates.”

Bullard unwittingly let the cat out of the bag. To the extent that it enters the ring to fight, it’s going to lose because it doesn’t have the will to really fight. Peter made this point in a recent podcast.

It doesn’t matter if the Fed raises rates. Because it’s not going to raise them enough. Inflation is going to get worse no matter what the Fed does because the Fed doesn’t have the political will to actually raise rates high enough to fight inflation.”

The Fed will raise rates a little. As Peter put it, the central bank has to pretend it’s going to fight inflation, especially with inflation now widely considered a problem.

So, the markets are bracing for the fight. What they’re not bracing for is that the Fed is going to lose the fight — that inflation is going to win.”