Fed official Bullard sends shivers into stocks by warning rate hikes may have to go much higher

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The Federal Reserve may have to raise its benchmark interest rate much higher than it has previously projected to get inflation under control, James Bullard, who leads the Federal Reserve Bank of St. Louis, said Thursday.

Bullard’s comments raised the prospect that the Fed’s rate hikes will make borrowing by consumers and businesses even costlier and further heighten the risk of recession. Wall Street traders registered their concern by sending stock market futures further into the red early Thursday. The Dow Jones Industrial Average was down about 330 points shortly before trading began.

Bullard’s remarks followed speeches by other Fed officials in recent days that suggested they see only limited progress, at most, in their use of steadily higher rates to fight inflation.

The Fed’s key short-term interest rate “has not yet reached a level that could be justified as sufficiently restrictive,” Bullard said. “To attain a sufficiently restrictive level, the policy rate will need to be increased further.”

The Fed is seeking to raise borrowing rates to a level that restrains economic growth and hiring in order to cool inflation.

The central bank has rapidly raised its benchmark rate by an aggressive three-quarters of a point at each of its last four meetings — the fastest series of hikes since the early 1980s. The cumulative effect has been to make many consumer and business loans costlier and to raise the risk of a recession.

Those increases have boosted the Fed’s short-term rate to a range of 3.75% to 4%, up from nearly zero as recently as last March, to the highest level in nearly 15 years.

Bullard suggested that the rate may have to rise to a level between 5% and 7% in order to quash inflation, which is near a four-decade high. He added, though, that that level could decline if inflation were to cool in the coming months.

AP’s earlier story follows below.

Stocks are opening lower on Wall Street and Treasury yields are rising after more indications from the Federal Reserve that the central bank may need to raise interest rates much higher than many people expect to get inflation under control. The Fed has been raising rates aggressively in order to tame inflation by applying the brakes to the economy. The S&P 500 fell 1.1% in the early going Thursday and the tech-heavy Nasdaq fell a bit more, 1.2%. The Dow was off 0.8%. The yield on the two-year Treasury note fell back to 4.45%.

THIS IS A BREAKING NEWS UPDATE. AP’s earlier story follows below.

Wall Street pointed toward more losses before U.S. markets opened on Thursday as concerns that Federal Reserve might not ease up on its aggressive interest rate hikes overtook last week’s optimism that the central bank was in a position to pull back.

Futures for the Dow Jones industrials fell 0.7% and futures for the S&P 500 slid 0.9%.

The Fed has been raising interest rates at a furious pace in an effort to slow the economy and tame the hottest inflation in decades. Analysts and investors have been worried it could hit the brakes too hard and bring on a recession.

“Markets are still unconvinced that the U.S. Fed will opt for lower magnitude rate hikes as incoming data sent mixed signals,” said Venkateswaran Lavanya at Mizuho Bank.

U.S. retail data has shown improvement, while industrial production has dropped, highlighting the resilience of the service sector, as opposed to weakening external demand.

This week’s U.S. government report on retail sales for October showed that consumer spending remains strong — up 1.3% from September to October — though it’s unclear whether that’s because of more purchases or higher prices.

Strong consumer spending is typically a good sign for the economy, but it could make the Fed’s strategy of cooling the economy more difficult. A strong labor market, with unemployment at just 3.7%, further complicates the Fed’s strategy.

Earlier this month, the Fed raised its short-term lending rate by another 0.75 percentage points, three times its usual margin, for a fourth time this year as part of its inflation-fighting strategy. Its key rate now stands in a range of 3.75% to 4%.

More increases are likely coming, though there had been some hope that the Fed will lighten up as more evidence comes in that prices have peaked.

The Labor Department reported last week that consumer inflation reached 7.7% in October from a year earlier, the smallest year-over-year rise since January. Excluding volatile food and energy prices, “core” inflation rose 6.3% in the past 12 months. Labor reported this week that prices at the wholesale level fell for the fourth straight month.

But those numbers, which came in better than analysts had expected, may not be enough to convince Fed officials to pull back on its expected rate hike at its meeting next month.

In Europe, France’s CAC 40 was 0.8% lower in midday trading, Germany’s DAX inched down 0.2% and Britain’s FTSE 100 lost 0.6%.

Japan’s benchmark Nikkei 225 shed 0.4% to finish at 27,930.57. Australia’s S&P/ASX 200 gained 0.2% to 7,135.70, after government data showed that the employment situation had improved in October from September.

South Korea’s Kospi slipped 1.4% to 2,442.90. Hong Kong’s Hang Seng dropped 1.2% to 18,045.66, while the Shanghai Composite fell 0.2% to 3,115.43.

China is maintaining its “zero-COVID” approach of mass testing many people alongside localized lockdowns and quarantines to eliminate the coronavirus entirely. Such restrictions have caused a supply crunch for some of Asia’s biggest manufacturers, denting economic growth.

Elsewhere, the lifting of pandemic restrictions have fueled hopes of greater consumer spending and tourism revenue.

Japan marked a trade deficit for the 15th month in a row in October, as both imports and exports reached record highs amid the soaring costs of energy and food and a drooping yen, according to government data released Thursday.

The deficit, at 2.16 trillion yen ($15 billion), was the highest for the month of October since comparable data was first compiled in 1979, and came despite a solid growth in exports, which rose 25.3% last month to 9 trillion yen ($64 billion) from a year ago. Among the products boosting exports were vehicles, medical products and electrical machinery, according to the ministry.

Also hanging over market sentiments, especially the energy sector, is the war in Ukraine. Any worsening could cause spikes in prices for oil, gas and other commodities that the region produces.

In energy trading, benchmark U.S. crude lost $1.80 to $83.79 a barrel. U.S. crude oil prices initially rose, before settling 1.5% lower Wednesday. Brent crude, the international standard, fell $1.49 to $91.37 a barrel.

In currency trading, the U.S. dollar rose to 140.14 Japanese yen from 139.51 yen. The euro cost $1.0332, down from $1.0396.

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Kageyama reported from Tokyo; Ott reported from Washington.

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