Fed Should Be Ready for Upside Risks to Inflation, Bullard Says

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The Federal Reserve should be prepared for inflation to surprise on the high end through next year, said St. Louis Fed President James Bullard.

Inflation is likely to remain above the Fed’s 2% goal and may surprise further to the upside, bolstered by a faster-than-expected economic recovery from the coronavirus pandemic, Bullard said Monday in a virtual event hosted by the Official Monetary and Financial Institutions Forum.

“We’re in a much stronger position with respect to reopening than we would have anticipated and inflation has come along with it,” Bullard said. “We have to be ready for the idea that there is upside risk to inflation and for it to go higher.”

Fed Should Be Ready for Upside Risks to Inflation, Bullard Says

Bullard is forecasting 2.5% core PCE inflation next year. The median projection of the 18 participants in the Federal Open Market Committee is for 3% core inflation this year and 2.1% in each of the next two years, according to estimates released last week following the central bank’s June meeting.

Chair Jerome Powell sounded a hawkish note in his press conference following the meeting, saying there was a risk to inflation rising more than the FOMC’s estimates. Officials also moved up their estimates for the first rate increase, with the median now seeing two hikes in 2023.

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