The US and the EU can avoid recession and achieve a soft landing by bringing inflation down to an acceptable level, a US central bank official said on Tuesday.
“A soft landing is feasible in the US and the EA [euro area],” St Louis Federal Reserve President James Bullard said during a speech at New York University.
However, getting there requires that the “shift” in monetary policy, as central banks aggressively hike interest rates to slow runaway inflation, is “executed well.”
A key factor would be managing inflation expectations, he added.
If markets and consumers expect prices to continue to rise then they would act accordingly, with stores raising prices, people rushing to buy goods before prices go up and employees demanding higher wages, among other things.
“Current inflation in the US and the euro area is near 1970s levels,” Bullard said.
The fight against inflation then was “costly” to the US economy, with multiple periods of recession, he said, attributing that to the Fed’s lack of “credibility.”
“Few believed that the Fed was serious about reducing inflation after an entire decade of allowing inflation to build,” he said.
As a result, then-Fed chair Paul Volcker had to “earn credibility” through aggressive fiscal policy.
However, “the Fed and the ECB [European Central Bank] have considerable credibility compared with their 1970s counterparts,” Bullard said.
He acknowledged that inflation had come in “hotter” than expected during the second quarter of this year. As a result, the Fed would have to hike interest rates “a little bit higher” than Buller had initially projected.
The Fed’s key rates, which set the tone for commercial banks in the US, are between 2.25 and 2.50 percent.
They would have to be raised to between 3.75 percent and 4 percent by the end of the year, Bullard said.
US inflation hit 9.1 percent in June, the highest in four decades.
Inflation also reached a new record in the eurozone last month, coming in at 8.9 percent.
Meanwhile, comments on Tuesday from other Fed officials including Mary Daly, Loretta Mester and Charles Evans served to highlight a challenging backdrop of rising borrowing costs, price pressures and slowing economic growth.
San Francisco Fed President Daly said the Fed has “a long way to go” on reaching price stability around a 2 percent inflation target.
Cleveland Fed President Mester said she wants to see “very compelling evidence” that month-to-month price increases are moderating.
Additional reporting by Bloomberg
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