Greenspan Nightmare Revisited?.. 'Hawk' Bullard Says "0.75% Rate Hike Should Also Be Considered" (Comprehensive)

US Foreign Affairs Committee Video Speech "Base Rate Should Be Raised to 3.5% by Year-End"

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Park Byung-hee] 'Hawkish' James Bullard, President of the Federal Reserve Bank of St. Louis (photo), 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 hike. The last time the Fed raised the benchmark interest rate by 0.75 percentage points at once was in 1994 during the tenure of Chairman Alan Greenspan.

Former Chairman Greenspan raised the U.S. benchmark interest rate from 3% to 6% over the course of a year starting in February 1994. During that tightening process, there were three 0.5 percentage point hikes and one 0.75 percentage point hike. The strong and sustained tightening over the year caused a significant shock to the global financial markets. The U.S. 10-year Treasury yield rose from 5.8% just before the rate hike in February of that year to over 8% in November, increasing by more than 2.2 percentage points. As of the 18th, the current U.S. 10-year Treasury yield is 2.86%, up 1.35 percentage points from 1.51% at the end of last year.

The Fed raised the benchmark interest rate last month for the first time in over three years, and at that time, Fed policymakers projected the 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 U.S. inflation rate is too high and 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 neutral real interest rate. Due to the impact of the Ukraine war, the U.S. consumer price inflation rate entered the 8% range for the first time since 1981. In response, Fed Chair Jerome Powell indicated that the Federal Open Market Committee (FOMC) might raise the benchmark interest rate by 0.5 percentage points at the meeting on March 3-4.

President Bullard said, "At this point, the case for a rate hike exceeding 0.5 percentage points is weak, but it should not be ruled out," adding, "To raise the benchmark interest rate to 3.5%, multiple 0.5 percentage point hikes may be repeated, but if necessary, a 0.75 percentage point hike should also be considered."

President Bullard said that the first priority to reach the 3.5% benchmark interest rate should be to quickly reach the neutral rate. The neutral rate refers to an interest rate level that neither stimulates nor contracts the economy. The Fed currently estimates the neutral rate to be about 2.4%.

He said, "I want the benchmark interest rate to exceed the neutral rate as early as the third quarter of this year," adding, "By then, the Fed will need to make more efforts 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 recent concerns about a U.S. economic recession, President Bullard said it is premature to make such judgments as the benchmark interest rate has only been raised once so far. He expects the U.S. economic growth rate this year and next year to show a favorable trend exceeding the long-term trend. He also forecasted 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 Federal Open Market Committee (FOMC) meeting.

This content was produced with the assistance of AI translation services.