Bullard backs September Fed hike as inflation stays above 2% target

James Bullard, former St. Louis Fed president, said raising interest rates in September "isn't too bad of an idea," pushing back against market pricing that puts a 69.4 percent probability on a hold at 3.50-3.75 percent.

"September rate hike isn't too bad of an idea," Bullard, dean of Purdue's Mitch Daniels School of Business, said Tuesday on Bloomberg Surveillance.

The comments come after the Fed's July meeting ended in a 9-3 vote to hold rates, with Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan dissenting in favor of a quarter-point increase. July CPI rose 3.4 percent year over year, while core CPI came in at 2.5 percent — still above the Fed's 2 percent target. The Fed's preferred PCE price index reached 4.1 percent in May before easing to 3.7 percent in June.

The September 15-16 FOMC meeting will be the first major test for Fed Chair Kevin Warsh, who took over in May. Markets have dialed back hike expectations after softer inflation and employment data, with CME FedWatch showing a 30.6 percent probability of a quarter-point hike. Goldman Sachs Chief Economist Jan Hatzius said a September increase is "very unlikely" given weaker retail sales, jobs, and inflation data.

The debate over whether the Fed should raise rates has intensified since the July meeting, when three officials formally dissented in favor of higher borrowing costs. Hammack has argued that allowing inflation to stay above 2 percent for years could change how businesses and consumers think about future prices, making it harder for the Fed to bring inflation under control.

Richmond Fed President Thomas Barkin suggested Thursday that the current level of interest rates may already be restrictive enough to bring inflation down without another increase. Barkin sees much of the recent inflation acceleration as stemming from shocks including tariffs, oil prices and the artificial intelligence investment boom — pressures that could eventually fade.

30-Year Yield at 19-Year High as Rate Debate Widens

The rate debate has rippled across markets. The 30-year Treasury yield recently hit a 19-year high, while the S&P 500 has continued to set fresh records even as investors weigh the possibility of higher rates. Producer prices were unchanged in July from the previous month, defying expectations for another increase, providing further evidence that the inflation surge seen earlier this year may be losing momentum.

Unemployment remains historically low at 4.1 percent, but job creation has been weak and inflation-adjusted wages have declined over the past six months. That combination creates an uncomfortable balance for policymakers: raising rates unnecessarily could further weaken employment and consumer demand just as inflation is beginning to cool, while cutting rates too quickly could reignite price pressures. Traders have largely abandoned bets on a September increase following the softer inflation and employment reports, although markets continue to see a significant chance that rates will be higher by the end of the year.

September Projections to Test Warsh's Path

The last time the Fed faced a similar inflation overshoot driven by supply shocks was in 2022, when the central bank ultimately raised rates by 425 basis points over eight consecutive meetings. The current situation differs in that the Fed has already held rates at 3.50-3.75 percent since the beginning of the year, and the inflation acceleration has been more modest.

Warsh has largely avoided indicating which direction he believes rates should move next. His public comments since taking over have instead emphasized restoring price stability. In congressional testimony last month, Warsh said policymakers had "no tolerance for persistently elevated inflation" while acknowledging the need to correctly assess rapidly changing economic conditions. The Fed's own July Monetary Policy Report described the labor market as broadly stable and noted only modest growth in household consumption, suggesting the committee sees limited urgency to move in either direction.

The September meeting will also include updated economic and interest-rate projections from Fed officials, providing a clearer picture of the committee's collective view. If inflation data continues to moderate, the case for a hike weakens further. But if energy prices resume their climb — particularly given stalled US-Iran talks — the pressure on the Fed to act could build again.

This article is for informational purposes only and does not constitute investment advice.