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00:00A week ago you were the lonely dissenter looking for a 50 basis point rate increase. Now the chair has all but promised a 50 basis point increase. At least that's the way the markets are taking it. At the May meeting what happened in the last week. I think I mean those that are interested can read my dissent statement which was out last Friday and is on our Web page. I think the Fed needs to move aggressively to keep inflation under control. Our policy as we sit here today is still a very large balance sheet and very very low policy rates. We need to get to neutral at least so that we're not putting upward pressure on inflation during this period when we have much higher inflation than we're used to in the US economy. Well when you say we have to get to neutral how quickly you have been arguing for more than 200 basis points. Yeah I think faster is better. And I think that 1994 tightening cycle or removal of accommodation cycle is probably the best analogy here. That one was quite successful. The Fed moved 300 basis points in a single year and then made some adjustments afterwards in nineteen ninety five. The result was that we hit our 2 percent inflation target over the next 10 years. The economy boomed in the second half of the 1990s. So I think this is a situation. It's like that we came out of the pandemic. You got surprised by inflation but now what you have to do is move the policy rate up discretely a fair amount not to be too disruptive but I think 50 basis point moves would definitely be in the mix and and then get to a level that we can be neutral. And then from there we can decide if we want to be restrictive and put further downward pressure on inflation. But right now we're putting upward pressure on inflation. That's the wrong place to be. Given where inflation is as I noted the markets whether you look at swaps or futures are now pricing in 50 for May force. The Fed doesn't like to surprise the markets. Should we assume that that's what you're going to do. Well I I can't I'm just one person on the committee. I don't know where the rest of the committee will be. And the chair has to manage that process. I thought that was a good speech yesterday that laid out the situation and we'll see where we are when we get to May 4th. The economic data have been closely watched. But from what you're saying it doesn't sound like it really matters between now and May that we're too low in terms of the Fed funds rate and inflation is too high. And those are the only two considerations. Well that's the big picture. And I think that's right. That we don't really need a lot of more data here. But you never know in this world and in this business you can always get surprised. Obviously we've got geopolitical risk out there. I guess my feeling on that is that you know we can't wait for that to get resolved. This could go on for a very long time. And certainly geopolitical tensions even if the war ended tomorrow the tensions would last for a long time. So I think the best contribution we can make is to get our house in order and make sure that the US economy is doing as well as we can achieve. And that will be the best that we can do to contribute to the global situation without going all our star on everybody. The idea of neutral is a moving target. Different people think of different levels. One analyst summed up your policy right now as the Fed is going to keep hiking until something breaks. Is that the best way to think about it. Now that's not a good way to think about. We're going to go to neutral which is the place where we're not putting upward pressure on inflation. I don't want to put upward pressure on inflation where you've got headline CPI you know close to 8 percent here and probably more to come in in the inflation reports ahead. So we want to get to neutral so that we're not putting upward pressure and probably get to a restrictive policy. So we're putting some downward pressure. History tells us that the faster we move to that situation the better chance we'll have of moving inflation back to Target and getting a boom in the US economy to what's neutral to you on the funds rate. I've got 2 percent. That's because my R star is lower than others. I'm willing to go with a zero hour star. So that's lower than other estimates that are out there. So I'd be 200 basis points on the funds rate but I'd want to go to 300 this years to get mildly restrictive and then that'll help us turn inflation around. And hopefully we'll also get some moderation inflation from other sources. What you worry about is inflation psychology getting. Bedded in the economy what are people in your district CEO's telling you about shortages. Supply chain problems. And about what they're able to charge the pricing power. Well most disturbingly they're telling me that pricing power is not a problem that they're able to raise prices and pass on the higher costs to their customers. So that's exactly the kind of situation that you don't want. You want them to be more worried about losing market share when they raise prices. And so for that dynamic has been worrisome to me. And that's something I think we need to get under control. I think a discrete adjustment to the policy rate would help break the inflation psychology and help keep inflation under control. In that sense they're also saying a great deal about supply chain issues and how those are going to continue and they will probably not get resolved anytime soon. We may have to wait out into 2023. That's way too long for this policy process. I don't think we can just wait for that to happen. What about the balance sheet. What's your best guess as to the best course for reducing the balance sheet and what effect would it have on interest rates. Yeah I I said in my dissent statement that I'd be happy to just get started on the balance sheet run off. Now I think we overstayed our welcome on purchases. You know it's always hard to make these judgments but in retrospect looks like we lowered the balance sheet expansion to go on too long. So I'm happy with it. Sooner is better. I would have been happy to do it at this meeting in this previous meeting last week. I see no reason to just not to just get going on that process. We've got a long ways to go on that dimension as well. The balance sheet approaching 9 trillion pre pandemic it was 4 trillion. So you've got a lot of a lot of balance sheet reduction that can go on. It would be passive runoff before we let you go. How would you advise people to look at the summary of economic projections and make sense of it given that it says interest rates are going to rise to be restrictive and inflation's going to just drop off over the next three years. But unemployment's not going to move at all. Well the real economy is doing very well. The U.S. economy is even with geopolitical risk is expected to grow at above trend pace this year next year even the year after that. And a lot of forecasts. So that's going to continue to put downward pressure on the unemployment rate and continue to have an even stronger labor market. If you look at the Kansas City Fed's labor market conditions index it's almost at an all time high here. It probably is going to go to an all time high. So one of the best labor markets in a generation. So I just think that that you know the real side of the economy with continued reopening following as the pandemic continues to fade here I think there's a lot of reasons to think that we'll have a robust economy going forward. And that suggests robust labor markets going forward. So what we have to do is adjust the policy rate and discreetly get to the right level. Then we can make adjustments from there and you can get a soft landing. And I think so Jim bullet did in 1984. We're going to do it again.

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Fed's Bullard on Rate-Hikes, Balance Sheet, Economy

Federal Reserve Bank of St. Louis President James Bullard discusses the factors behind his dissenting vote in last week's Federal Open Market Committee rates decision, the path to rolling-off the central bank’s balance sheet, and outlook for the U.S. economy. He speaks with Bloomberg's Mike McKee on "Bloomberg Surveillance." (Source: Bloomberg)

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