Fed: Hawkish, but Bullish

Fed President Bullard has revealed himself to be among the most hawkish of the Fed officials. But who would have thought he’d also be among the most bullish? 

Tuesday, James Bullard spoke out in favor of raising the Fed Funds Rate to 3.5% by year end — in 50-basis point increments. He even said he wouldn’t rule out a 75 basis-point hike. That said, Bullard believes that the US will still have above trend GDP growth and declining unemployment in 2022 and the years to follow. 

With all of the panic about rate hikes and potential recessions, why is Bullard so bullish?

It worked in the 1990’s

Bullard first referenced a period during the 1990’s, when the Fed lifted rates at a similarly swift pace, at one point hiking rates by 75-basis points in a single meeting. 

“That one was successful and did set up the US economy for a stellar second half of the 1990’s, one of the best periods in US macroeconomic history, so it was successful.” Said Bullard referencing the 1994 rate hike cycle, when the Fed hiked rates by 300 basis points. 

It worked in the 1980’s

Bullard also referenced a paper written by Nobel Prize winning economist Tom Sargent in 1982 during a similar period of high inflation. During that time, many officials were skeptical about the Fed’s ability to fight inflation (just as many are today). However that’s exactly what happened — Fed policy shifted, and inflation fell.

Bullard went on to say that “the key is making clear to the public and markets that the Fed is in a new inflation fighting regime and that it means what it says about fighting it.” If the central bank gets that right, Bullard believes that the US economy could be setting up for a strong, bullish period. 

The market has already done the heavy lifting

Bullard finished on an important final note: The bond market has done an awful lot of the heavy lifting already. “You are not going to get 300 additional basis points of tightening in the 2-year or the 10-year, the bulk of it is already done.” 

These points were bolstered by Fed Official Charlie Evans, who said that the US economy should do well in a rising rate environment. This sort of bullish-but-hawkish viewpoint follows the same sentiment that we last heard from Fed Chair Jerome Powell. 

During the March Fed meeting, Powell said,

“In my view, the probability of a recession in the next year is not particularly elevated. […] Indeed, one that will be able to flourish in the face of less accommodative monetary policy.”

Notably, during that meeting, the 2-year Treasury Yield spiked to a multi-year high of 1.994%. It is currently up more than 27% since then, to 2.546%.

Source: Tradeweb