Why This Fed President Expects Economic Expansion In 2022

On Monday, St. Louis Fed President James Bullard delivered a presentation on the economic landscape to the Barcelona School of Economics.

What Bullard Expects: Inflation in the U.S. is comparable to levels seen in the 1970s, and without credible Fed action, the economy would see higher inflation and volatile economic performance, Bullard said in the presentation.

Due to the uncertainties surrounding the Russia-Ukraine War and China slowdowns, it has created a storm of inflationary pressures, he said. Fifteen months ago, inflation was under the 2% benchmark, Bullard said. 

The Kansas City Fed’s labor market index, which aggregates various measures of labor market performance into a single metric, remains near highs last seen in 1999-2000. 

Bullard noted that U.S. labor market remains robust, as the economy has reached pre-pandemic unemployment of 3.6%, with output expected to continue through 2022.

Markets priced in interest rates prior to Fed action as the Fed began to turn hawkish in the second half of 2021, Bullard said. 

A divergence exists between actual inflation and TIPS-based expected inflation, as expected inflation still remains high, he said.

This could result in lower or higher inflation, as they are correlated, the St. Louis Fed president said, adding that he hopes for expected inflation to trend lower.

The Case For Economic Expansion: “The indicators are that there will be continued expansion in the quarters ahead. Itt won't be as fast as last year, but last year the U.S. economy had grown at 5% in real terms,” Bullard said. 

The real potential GDP long-term growth benchmark for 2022-2026 is 2%, he said, adding that although the trend line is slowing towards the benchmark, we are still above it. 

The Last Word: With inflation well above the 2% target, Fed policy and credibility will be at the forefront of every meeting.

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