Fed's 0.75%P Hike in 28 Years?…Bullard Says "Must Consider If Necessary"

Bulledeu Chairman's Foreign Affairs Committee Video Speech: "Base Interest Rate Must Be Raised to 3.5% by Year-End"

James Bullard, President of the Federal Reserve Bank of St. Louis
Photo by Reuters Yonhap News

[Asia Economy Reporter Park Byung-hee] 'Hawkish' James Bullard, President of the Federal Reserve Bank of St. Louis, argued that if necessary, the U.S. benchmark interest rate should be raised by 0.75 percentage points at once.

According to Bloomberg on the 18th (local time), President Bullard said in a virtual speech at a U.S. Foreign Relations Committee event that the U.S. benchmark interest rate should be raised to around 3.5% by the end of this year, and the Federal Reserve (Fed) should not rule out a 0.75 percentage point increase. The last time the Fed raised the benchmark interest rate by 0.75 percentage points at once was in 1994 during Alan Greenspan's tenure as chairman.

The Fed raised the benchmark interest rate last month for the first time in over three years, and at that time, Fed policymakers expected the benchmark rate to rise to about 1.9% by the end of this year. President Bullard argued that the benchmark interest rate should be raised by about twice that amount.

President Bullard reiterated his previous stance that the benchmark interest rate should be raised to 3.5% based on the Taylor rule. The Taylor rule is a formula used to calculate the appropriate benchmark interest rate by utilizing inflation rate, gross domestic product (GDP) gap, and estimates of the natural real rate.

President Bullard emphasized the need to raise the benchmark interest rate quickly, citing that inflation in the U.S. is too high. Due to the impact of the Ukraine war, the U.S. consumer price inflation rate has entered the 8% range for the first time since 1981. In response, Fed Chair Jerome Powell stated that the Fed may raise the benchmark interest rate by 0.5 percentage points at the Federal Open Market Committee (FOMC) meeting on May 3-4.

President Bullard said, "At this point, the basis for raising the benchmark interest rate by more than 0.5 percentage points is weak, but it should not be ruled out," adding, "While the Fed may repeatedly raise the benchmark interest rate by 0.5 percentage points to reach 3.5%, a 0.75 percentage point increase should also not be excluded."

He also said that to reach the 3.5% benchmark interest rate, the first goal should be to reach the neutral rate. The Fed currently estimates the neutral rate to be about 2.4%. President Bullard said, "I want the benchmark interest rate to exceed the neutral rate as early as the third quarter of this year," and "By then, the Fed will need to work harder to reduce inflationary pressures." He emphasized, "I believe raising the benchmark interest rate to around 3.5% by the end of this year will be beneficial for us."

Regarding the recently emerging risks of a U.S. economic recession, President Bullard said it is still premature to make a judgment. He forecasted that the U.S. economic growth rate this year and next year will show a favorable trend exceeding the long-term trend. He also predicted that the current unemployment rate of 3.6% will fall below 3% this year.

President Bullard also expressed hope that the Fed will begin quantitative tightening (QT), which reduces its asset holdings, starting from the next FOMC meeting.