Earlier this month, the Fed raised interest rates by 0.75 of a percentage point, the year’s sixth rate hike, bringing the federal funds rate to a range of 3.75% to 4%. 

Some have criticized the Fed for moving too fast on its rate hikes, fearing that the central bank could inadvertently steer the economy into a recession. But so far the Fed appears to be making modest headway, given two encouraging reports this month—one reflecting how fast prices are rising for consumers and another for producers. 

But even if inflation is showing signs of receding, not all Fed officials think the central bank’s work is done.

“Thus far, the change in the monetary policy stance appears to have had only limited effects on observed inflation,” James Bullard, president of the Federal Reserve Bank of St. Louis, said at an event Thursday in Louisville. 

Bullard said that the Fed’s strategy is to raise rates to a “sufficiently restrictive” level to slow the economy and contain inflation, but the central bank hasn’t yet achieved its goal. 

“My approach to this question is based on ‘generous’ assumptions—assumptions that tend to favor a more dovish policy over a more hawkish one,” he said. “Even under these generous assumptions, the policy rate is not yet in a zone that may be considered sufficiently restrictive.”

A divided Fed

As inflation shows signs of falling, economists and even some Fed officials have become more hopeful.

At the release of last week’s encouraging Consumer Price Index report, the University of Michigan’s Justin Wolfers, Harvard University economist Jason Furman, and Nobel Prize winner Paul Krugman all wrote on Twitter that the U.S. economy may already be past peak inflation. Wolfers and Krugman both cited so-called lagging indicators—signs of receding inflation that take longer to show up in the economy such as falling rental prices—as evidence. 

In announcing the latest interest rate hike on Nov. 2, Fed officials said they would begin to “take into account” factors other than headline inflation, signaling smaller interest rate hikes in the future. Some officials, including Fed Vice Chair Lael Brainard, Chicago Fed President Charles Evans, San Francisco President Mary Daly, and Dallas President Lorie Logan have all individually signaled the central bank might consider slowing rate hikes soon.

San Francisco’s Daly, for instance, said that ending hikes with the federal funds rate between 4.75% and 5.25% would be “reasonable.” But in his comments on Thursday, Bullard voiced his view that the Fed will likely have to go higher.

“Based on this analysis today, I would say 5% to 5.25%. That’s a minimum level,” he said.

Bullard came to this conclusion by drawing on the Taylor rule, a formula for deciding monetary policy devised by Stanford University economist John Taylor 30 years ago. It uses recent economic growth and inflation data—including lagging indicators—to calculate an ideal interest rate policy for any current economic environment. The Taylor rule focuses primarily on inflation data rather than economic growth, and the deviation of inflation from the Fed’s target, which is traditionally a 2% annual rate. 

Although Bullard arrived at his proposed 5%–5.25% rate through the Taylor rule, he noted that this was only a “minimal recommended value” that could go even higher under “less generous assumptions” about the state of the economy.

“While the policy rate has increased substantially this year, it has not yet reached a level that could be justified as sufficiently restrictive,” he said. “To attain a sufficiently restrictive level, the policy rate will need to be increased further.”

But critics have warned that the Fed risks creating a recession in the U.S. and worldwide as more central banks follow its lead. Meanwhile, some economists, such as former Treasury Secretary Larry Summers, take the opposite tack by saying that only a severe recession will be enough to fight the current inflation levels in the U.S.

On Thursday, Bullard said he expects inflation to start falling in 2023, and addressed concerns about slowing economic growth. “It is possible that increased financial stress could develop in such an environment,” he said, while adding that the Fed has seen few signs of extreme financial stress so far despite the rapid rate hikes.

“The transparency with which these [policy rate] increases have been delivered, along with forward guidance, seems to have allowed for a relatively orderly transition to a higher level of interest rates so far,” he said.