Beige Book - June 1, 2022

Federal Reserve Bank of St. Louis President James Bullard presented “The First Steps toward Disinflation” (PDF) virtually on Wednesday at an event hosted by the Economic Club of Memphis. Bullard noted that inflation in the U.S. is comparable to levels seen in the 1970s. He added that U.S. inflation expectations could become unmoored without credible Fed action, possibly leading to a new regime of high inflation and volatile real economic performance. “The Fed has reacted by taking important first steps to return inflation to the 2% target,” he said. “Market interest rates have increased substantially, partially in response to promised Fed action.” Meanwhile, U.S. labor markets remain robust, and output is expected to continue to expand through 2022, he said. Actual Inflation and Expected Inflation Bullard noted that the Fed has a statutory mandate to provide stable prices for the U.S. economy, and that the Federal Open Market Committee (FOMC) has an associated inflation target of 2% stated in terms of headline personal consumption expenditures (PCE) inflation. He pointed out that, as of April, the headline PCE inflation rate was 6.3%; the core PCE inflation rate (which excludes food and energy prices) was 4.9%; and the Dallas Fed trimmed mean inflation rate (which measures only the middle portion of the price change distribution) was 3.8%. “The current U.S. macroeconomic s tweet at 12:58pm: *BULLARD: FED MUST FOLLOW THROUGH TO RATIFY ITS FORWARD GUIDANCE *BULLARD: CREDIBILITY OF FED’S 2% INFLATION GOAL IS UNDER STRAIN tweet at 1:01pm: FED'S BULLARD: THE EFFECTS OF THE FED'S FORWARD GUIDANCE ON RATES IS ALREADY TAKING HOLD ON ECONOMY AND INFLATION. tweet at 1:10pm: FED'S BULLARD: GLOBAL QT' SHOULD PUT UPWARD PRESSURE ON RATES.

tweet at 2:45pm: FED'S BULLARD: IT'S TOO EARLY TO SAY IF WE'VE SEEN A PEAK IN INFLATION; WILL NEED MORE THAN A FEW TENTHS TO MAKE A JUDGMENT. tweet at 2:46pm: FED'S BULLARD: SOMETIMES RELATIVELY STABLE LONGER-TERM INFLATION EXPECTATIONS ARE TAKEN AS A SIGN THAT THE FED DOESN'T HAVE TO DO AS MUCH; I DON'T TAKE THEM THAT WAY. tweet at 2:46pm: FED'S BULLARD: I WOULD PUT NEUTRAL AT ABOUT 2%, BUT WILL NEED TO GO ABOVE THAT TO BRING DOWN INFLATION.Bullard: Pace of 50 bps per meeting is a 'good plan' for now A good chunk of inflation is persistent and will require concerted action • I would put neutral at about 2% but will need to go above that to bring down inflation • Rise in 1-to-3 year inflation expectations is concerning • I don't take relatively stable long-term inflation expectations as a sign the Fed doesn't have to do much • It's too early to say if we've seen a peak in inflation, will need more than a few tenths to make a judgement