Official from the Fed suggests substantial rate increases may be necessary

James Bullard, President of the Federal Reserve Bank of St. Louis, stated Thursday that it may be necessary to raise its benchmark rate to keep inflation under control.

Bullard's remarks raised concerns that Fed rate hikes could make borrowing for consumers and businesses more expensive and increase the risk of recession. Wall Street traders expressed their concern when the stock market went into red on Thursday. The S&P 500 finished the day at 3,946.56 by 0.3%.

Bullard's comments came after speeches made by other Fed officials recently that suggested they are only seeing limited progress in using steadily higher rates to combat inflation. Bullard's views are more significant because he is a member of this year's Fed rate-setting committee.

Bullard stated that the Fed's key short term interest rate has not reached a level that can be considered sufficiently restrictive. The Fed's key short-term interest rate “has not yet reached a level that could be justified as sufficiently restrictive,” Bullard stated.

To cool inflation, the Fed will raise borrowing rates so that economic growth and employment are slowed.

At each of its four most recent meetings, the central bank raised its benchmark rate rapidly by a aggressive three quarters of a point — the largest series of increases since the 1980s. This has had the cumulative effect of making many business and consumer loans more expensive and increasing the risk for a recession.

These increases have raised the Fed's short term rate to a range between 3.75% and 4%. This is an increase from almost zero as recently as March 2013 to its highest level in almost 15 years.

Bullard suggested that inflation may need to be slowed to between 5% to 7% to stop the current four-decade-high. Bullard said that this rate could drop if inflation cools in the future.

Loretta Mester is the president of the Cleveland Fed. She echoed Bullard's comments in Thursday's speech, where she stated that the Fed was “just beginning” to move into restrictive territory. This suggests Mester, who is one of the more hawkish policymakers expects rates to rise much further.

Fed lingo is that Fed hawks are more concerned with raising rates to combat inflation while Fed doves prefer lower rates to encourage growth and employment.

Lael Brainard (Fed Vice Chair), a more cautious official, suggested Monday that the Fed had already brought rates to a level that restrains economic growth. However, she said that the central bank needed to “further into restrictive territory”.

On Wednesday, Esther George (president of the Kansas City Fed) said that a recession was possible due to the rapid pace at which the Fed tightened credit.

She stated that she has not seen “a time of tightening this severe in my 40 years of service with the Fed.”

Fed officials, including Chairman Jerome Powell, have made it clear they will likely raise rates by half a percentage point at their December meeting, which is a decrease from previous increases.

However, they insist that smaller increases — analysts are expecting quarter-point increases at February and March meetings — do not mean that the Fed is ending its increases as widely assumed by the financial markets.

Mary Daly, president of San Francisco Federal Reserve, stated that “Pausing” is not on the table at the moment.

Originally published on