Federal Reserve President: Current Plans to Contain Inflation Are a “Fantasy”

So here it is, April 2022. One year since inflation reemerged on the American landscape.

You may recall there was no shortage of professional observers who immediately dismissed the inflation number we saw last April – 4.2% – as “transitory.” The suggestion then was that the higher prices were simply a short-term consequence of pent-up demand playing out in the post-pandemic economy. Among those who seemed largely unconcerned at the time about inflation were policymakers at the Federal Reserve.

Not all of the Fed’s key players were blasé about the return of actual inflation, however. The most prominent voice at the Fed who last year suggested straight away that inflation might be more than transitory belongs to St. Louis Federal Reserve President James Bullard. In May 2021, following the announcement of the 4.2% April CPI, it was Bullard who opined that “some of this [inflation] is transitory, but not all of it.”[1]

Then in June 2021, just days after the announcement that May’s CPI jumped to 5%, Bullard said he was in favor of initiating rate hikes in 2022 as the Fed’s Open Market Committee was saying not to look for any rate increases until 2023.[2] In November, before Fed Chairman Jerome Powell got around to announcing the central bank would “retire” use of the word “transitory,” Bullard updated his own outlook to say he was “penciling in” two rate hikes in .[3]

In retrospect, it seems to me that Bullard was the proverbial “canary in the coal mine” when it came to sounding the alarm on inflation as a significant and potentially chronic problem. Now that inflation has reached 8.5% – the highest level in more than 40 years – the Fed’s most vocal interest-rate hawk is being openly critical of the central bank’s more restrained plan to get price increases under control, going as far as to call it a “fantasy” in a recent interview with the Financial Times.[4]

But in his advocacy for much higher interest rates from the central bank, Bullard also is advocating for an inflation-fighting protocol with a reliable historical record of triggering recession.[5] And so in my view, should problem inflation persist and Bullard’s voice gain influence inside the Federal Reserve, retirement savers may want to be prepared as much for the possibility of recession as they hopefully are for the certainty of the inflation bedeviling all of us right now.

It seems like this all puts us between a rock and hard place, but there are things retirement savers can do to minimize the damage to their personal savings using precious metals. Before I talk any more about preparation, however, it might be helpful – perhaps even instructional – to look a little further at what Mr. Bullard has on his mind right now. 

Bullard: Neutral Rates Don’t Put Downward Pressure on Inflation

You may know by now the Fed is walking a tightrope on the matter of rate hikes. They realize inflation has to be contained. But the central bank desperately wants to avoid plunging the economy into recession. They have a solution they hope will allow them to remain upright throughout the duration of their high-wire act: keep interest rates at a “neutral” level.

“Neutral” rates ideally facilitate a “Goldilocks” effect on the economy – not too hot, not too cold, but just right. And neutral rates currently are estimated by the Federal Open Market Committee to be around 2.4%, which, for perspective, is less than half of what the Fed Funds rate merely has averaged over the last half-century (5.%).[6] James Bullard isn’t having it.

“There’s a bit of a fantasy, I think, in current policy in central banks,” the St. Louis Fed president said in his April 13 Financial Times interview. “Neutral is not putting downward pressure on inflation. It’s just ceasing to put upward pressure on inflation.”

“We have to put downward pressure on the component of inflation that we think is persistent,” he added. “Getting to neutral isn’t going to be enough it doesn’t look like, because while some of the inflation may moderate naturally . . . there will be a component of it which won’t.”

Then on Monday, April 18, Bullard effectively doubled-down on his rate posture. In a speech to the Council on Foreign Relations, he said rates should be at 3.5% by the end of this year and that even single-event rate hikes of as high as 75 basis points should be up for consideration.[7] You may recall that March’s rate hike – the first one in more than three years – was just 25 basis points. And Bullard didn’t vote for it. He wanted a 50-basis-point increase.

Bullard gives me the impression that he’s had enough of what he perceives as Federal Reserve fecklessness in dealing with the inflation that’s creating financial hardships for Americans. Just last week, I wrote about seniors exiting retirement altogether and going back to work because their savings cannot withstand inflation’s effects. In his interview with the Financial Times, Bullard said the Fed’s very credibility with the public is at stake as it remains reluctant to do the heavy lifting necessary to reduce inflation.

Is the Fed’s expectation that inflation will back off on the basis of modest rate increases a “fantasy”? James Bullard obviously thinks so. And other respected economists agree, including James Golub, chief U.S. equity strategist and head of quantitative research at Credit Suisse. In his opinion, the Federal Funds rate should be all the way up to 9.8% right now to reduce inflation.[8]

As it happens, whether it’s a result of Bullard’s persistent, vocal advocacy for more stringent rate hikes or simply a shift in posture based on their own evaluation process, there now does seem to be growing support among Fed policymakers for ratcheting up the current rate-tightening regime.

Other Fed Policymakers Now Embracing a More Rigorous Rate-Tightening Regime

New York Fed President John Williams said last week that a 50-basis-point increase in May is “a very reasonable option.”[9] And Christopher Waller, a member of the Fed’s Board of Governors, said recently he’s all in on a 50-basis-point increase next month and is open to “possibly more” in June and July.[10] Even Federal Reserve Chairman Jerome Powell, who has been the principal central bank figure in urging rate restraint, has been making more noise lately to the effect that he’s supportive of bigger rate hikes in the months ahead.[11]

In my view, Americans should start to consider the growing likelihood that the Federal Reserve will make what amounts to a significant change to their previous rate-tightening strategy. And they should think about what effect sharply higher interest rates throughout at least this year could have on their overall financial profile and circumstances.

Retirement savers in particular have much to think about, in my opinion. As I mentioned earlier, inflation is already a fact of life, which means the loss in purchasing power that accompanies higher prices is a fact of life, as well. But now as the prospect of more substantial rate increases looms larger, so does the possibility of economic slowdown – even recession. Accordingly, I would propose that those retirement savers who so far have resisted implementing any measures to help hedge their nest eggs against the effects of economic uncertainty reconsider doing so at this time.

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[1] Jeff Cox, CNBC.com, “Fed’s Bullard says ‘it’s too early to talk taper’ while the pandemic continues” (May 11, 2021, accessed 4/21/22).

[2] Jeff Cox, CNBC.com, “Fed’s Jim Bullard sees first interest rate hike coming as soon as 2022” (June 18, 2021, accessed 4/21/22).

[3] Brian Cheung, Yahoo.com, “Fed Chairman Jerome Powell retires the word ‘transitory’ in describing inflation” (November 30, 2021, accessed 4/21/22); Matt Clinch, CNBC.com, “Federal Reserve’s Bullard expects two rate hikes next year” (November 9, 2021, accessed 4/21/22).

[4] Colby Smith, Financial Times, “Fed official: It’s ‘fantasy’ to think modest rate rises will tame inflation” (April 13, 2022, accessed 4/21/22).

[5] Michael Kramer, Investing.com, “The Fed May Push The U.S. Economy Into Recession” (January 14, 2022, accessed 4/21/22).

[6] Steve Matthews, Bloomberg.com, “Fed’s Bullard Says 75 Basis-Point Hike Could Be Option If Needed” (April 18, 2022, accessed 4/21/22); Trading Economics, “United States Federal Funds Rate” (accessed 4/21/22).

[7] Ibid.

[8] Vivien Lou Chen, MarketWatch, “Federal Reserve’s projected rate hikes ‘won’t sufficiently tame’ inflation, Credit Suisse says” (March 30, 2022, accessed 4/21/22).

[9] Lindsay Dunsmuir and Ann Saphir, Reuters.com, “Fed’s Williams: 50 basis point hike is a ‘very reasonable option’ for May” (April 14, 2022, accessed 4/21/22).

[10] Ann Saphir, Reuters.com, “Fed’s Waller: need fast rate hikes, but not a Volcker moment” (April 13, 2022, accessed 4/21/22).

[11] Alister Bull and Bloomberg, Fortune.com, “Powell may be about to seal deal on a half-point hike” (April 17, 2022, accessed 4/21/22).