Former Fed Bullard said June FOMC Forecast had "big element of a recessionary scenario"

https://www.wsj.com/economy/central-banking/recession-fears-have-been-blown-out-of-the-water-long-serving-fed-president-says-da0b5461?st=b7za9klbwwdszm1

I will highlight some notable quotes from the recent interview with former St. Louis Fed James Bullard. He resigned on Aug 14, 2023. Although he was known as one of the most hawkish Fed member, he was also correct over the last 2 years in expecting inflation to be sticky, and expecting the Fed to hike way more than what anyone ever anticipated. He is also one of the most bullish, arguing that the economy is more resilient than people think. He is also in the camp of shorter lag for rate hike, arguing that most of the rate hike effect have already passed through to the real economy (you can observe that when he said the easing of financial condition after SVB is feeding into a stronger 2H 2023).

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There's an interesting statement where he said there're a lot of recession scenarios in the June 2023 FOMC dot plot (not the Fed staff forecast made by economists at the Fed, but the actual dot plot by FOMC members. In June and July, Powell said he disagreed with the Fed staff recession forecast, and the Fed revised up full year 2023 real GDP growth from 0.4% to 1%). No current Fed officials will ever admit they have a recession in their forecast. Only former Fed officials like Richard Clarida and James Bullard can talk openly about these things. To get around using the word "recession", Fed officials might use words like "softish" or "bumpy" landing, which are equivalent to a mild recession. I've even seen big banks like Morgan Stanley consider a mild recession as "soft landing", and they were the early soft landing forecasters, along with Goldman Sachs.

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Bullard: I think it’s turning out that the Fed’s policy has been very successful, and I think that will be the buzz at Jackson Hole. I don’t know what will be in the speeches, but the talk will be that this has been quite successful.

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There were a lot of heavy predictions of recession. I think those were just overblown.

Because of the SVB situation, rates actually went down in the spring. And there’s been an unwitting easing of financial conditions, which is feeding into a stronger second half for the U.S. economy. And now everyone’s scrambling to reprice based on that stronger economy.

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The faster growth is a bit of a threat because the forecast was that you’d have very weak growth or even a recession, and now that doesn’t really look like it is materializing. So you’d have to upgrade your outlook for inflation probably based on that alone. You still have a very tight labor market, and now you have a reacceleration in the U.S. economy. The risks are tilting a little bit more toward the idea that inflation won’t fall as fast as anticipated.

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Bullard: I’m skeptical that we’re returning to that [pre-pandemic environment of low interest rate and low inflation]. You’ve got inflation above [the Fed’s 2%] target, and it’s probably going to be relatively sticky above target. Roughly speaking, the policy rate would have to be higher than the inflation rate during that whole period when inflation is above target. That sounds like a higher interest-rate regime than the one that has existed since 2008.

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And in the ’70s, you had similar shocks and the Fed didn’t react enough or fast enough. They stopped up short, and you got a decade of high and variable inflation. This time we reacted more appropriately and more effectively, and now we’re getting the fruits of that by getting inflation down.

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Bullard: The [Fed’s rate-setting] committee will have to re-evaluate its forecast in September for the summary of economic projections. And those projections in June still had a big element of a recessionary scenario—which at least, as of today, looks like it’s blown out of the water. That suggests that the committee would keep its rate increase in there for sometime this fall. It seems like you’d probably follow through on the rate increase that was penciled in in June.

The bigger question for markets, though, is whether the economy really does accelerate quite a bit in the second half of 2023 and the committee feels compelled to, let’s say, go above 6% on the policy rate—possibly because some of the inflation readings turn around and blip up or maybe have a little bit of a sustained increase.

I don’t think markets are really ready for that. But that’s an increasing risk now.

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