In an exclusive interview with the Wall Street Journal ahead of the Fed's Jackson Hole annual economic symposium, former St. Louis Fed chief James Bullard spoke about the U.S. economy's unexpected resilience and the potential for higher interest rates.

Bullard, who recently assumed the position of Dean at Purdue University's Daniels School of Business, told WSJ's Nick Timiraos that predictions of an impending recession have been "blown out of the water."

Bullard dismissed exaggerated recession predictions, emphasizing that the risks were not as dire as some on Wall Street believed.

Bullard's analysis revealed that the U.S. economy's performance has far exceeded the expectations set earlier this year.

With unemployment at 3.5%, Bullard lauded the Federal Reserve's success in taming inflation—reducing headline CPI inflation from 9% to slightly over 3%.

When comparing the Fed's current tightening cycle to that of the 1970s, Bullard told WSJ: "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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Navigating Uncharted Waters: Balancing Growth and Inflation

Bullard emphasized that the pace of economic expansion, which was not initially anticipated, could necessitate further interest rate hikes. He cautioned that markets aren't "really ready for that."

He further emphasized the tight labor market and the U.S. economy's reacceleration, suggesting that inflation might not decrease as quickly as previously expected.

Regarding a return to the pre-pandemic era of low interest rates and inflation, Bullard expressed skepticism.

As inflation remains above target, Bullard hinted at the likelihood of a prolonged period of slightly higher interest rates, signaling a shift from the low-rate regime that persisted since 2008.

According to Fed futures, markets are currently pricing in a 13.5% chance of a rate hike in September and a 35% chance of a hike by November's FOMC meeting. The yield on the U.S. 2-year Treasury note, also tracked by the US Treasury Note ETF (NYSE:UTWO), traded around 5% on Wednesday.

Chart: US Interest Rates Recently Outpaced Inflation

This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.

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