Economy

Shipments to and from Russia increased 12.76% in March to $11.67 billion, Chinese customs data showed on Wednesday, slowing from 25.7% growth in February, when Russia launched its invasion.Still, the growth in March was faster than the 7.75% increase in China’s trade with all countries and regions to $504.79 billion that month. Russia invaded Ukraine on Feb. 24 in a move that Moscow described as a “special military operation” designed to demilitarise and “denazify” its southern neighbour.Beijing has refused to call Russia’s action an invasion and has repeatedly criticised what it says are illegal Western sanctions to punish Moscow.Several weeks before the attack on Ukraine, China and Russia declared a “no-limits” strategic partnership. Last year, total trade between China and Russia jumped 35.8% to a record $146.9 billion. As sanctions against Russia mount, China could offset some of its neighbour’s pain by buying more. But analysts say they have yet to see any major indication China is violating Western sanctions on Russia.China’s economic and trade cooperation with other countries including Russia and Ukraine remains normal, customs spokesman Li Kuiwen said at a news conference. In the first quarter, China’s trade with Russia jumped 30.45% from a year earlier, within the range of gains seen in previous quarterly increases. Russia is a major source of oil, gas, coal and agricultural commodities for China. Russia’s economy is on course to contract by more than 10% in 2022, former finance minister Alexei Kudrin said on Tuesday, hit by soaring inflation and capital flight.The World Trade Organization (WTO) on Tuesday revised down its forecast for global trade growth this year because of the impact of the Russia-Ukraine war.($1 = 6.3646 Chinese yuan) More

TOKYO (Reuters) -The Bank of Japan (BOJ) will not introduce a digital yen as a means to achieve negative interest rates, an idea sometimes discussed in academic circles, a senior central bank official said on Wednesday.In upcoming experiments on issuing a central bank digital currency (CBDC), the BOJ will explore features such as setting a limit on the amount of transactions and holdings for each entity, BOJ Executive Director Shinichi Uchida said in a speech.The central bank will also examine whether to make the digital yen interest-bearing, though doing so might be unnecessary as the CBDC could then end up being a close substitute for bank deposits, he said.”While the idea of using such a functionality as a means to achieve a negative interest rate is sometimes discussed in academia, the Bank will not introduce CBDC on this ground,” Uchida said in a speech.The BOJ has not decided whether to issue a digital yen but has moved to a second phase experiment from April to prepare for a possible launch in the future. More

UK inflation rose to 7 per cent in March, hitting a fresh 30-year high after fuel prices surged and putting more pressure on the Bank of England to increase interest rates again. The increase in consumer prices was up from an annual rate of 6.2 per cent in February and 10 times the 0.7 per cent recorded in March 2021, according to data published by the Office for National Statistics on Wednesday.The reading was above the 6.7 per cent forecast by economists polled by Reuters, and the highest since March 1992, when it reached 7.1 per cent.Grant Fitzner, ONS chief economist, said the rise in inflation was “broad-based” and added that among the largest increases were petrol costs, with prices mostly collected before the cut in fuel duty announced in the Spring Statement on March 23.Transport fuel prices jumped at an annual rate of 30.7 per cent, following a 9.9 per cent increase over the previous month, a near record monthly rise, reflecting surging international energy prices after Russia invaded Ukraine.Jack Leslie, senior economist at the Resolution Foundation think-tank, said: “The sheer scale of this inflation-led squeeze on living standards makes it all the more remarkable how little support the chancellor provided in his Spring Statement — a decision that will surely have to be revisited before the autumn Budget.”Inflation in March was more than three times the Bank of England’s target of 2 per cent, and higher than the rate of “around 6 per cent” that it forecast at its last meeting. The BoE said it expected inflation to climb to 8 per cent in April following the increase in the energy price cap set by the regulator, and possibly further in the autumn when the cap is next adjusted. With inflation constantly coming in higher than expected, most economists now forecast it will rise higher than that.Core inflation, which excludes volatile items such as energy, food, alcohol and tobacco, rose to 5.7 per cent in March, up from 0.9 per cent in the same month last year and above analysts’ expectations.Prices of many items rose at a double-digit annual rate, including furniture, cooking oil, clothing, household utensils, second-hand cars, hotels and flight tickets. The increase reflects businesses passing on more of their rising costs while demand rebounded in some sectors following the easing of Covid-19 restrictions.Food prices rose 5.9 per cent, the highest in a decade, with most types of food registering annual increases above 5 per cent, including bread, meat, milk and fruit. Rising consumer prices erode what households can buy with their money and official statistics forecast that UK households’ real income will contract this year at the sharpest rate since records began in the 1950s.March’s reading is the last inflation report before the next BoE monetary policy decision on May 5. The central bank has increased its main rate three times since December, from a historic low of 0.1 per cent to 0.75 per cent.“The figures will add further pressure on the Bank of England to accelerate the pace of interest rate increases, even though the growth outlook has deteriorated in the past few months,” said Dan Boardman-Weston, chief executive at BRI Wealth Management.George Buckley, economist at Nomura, forecast that interest rates would rise in May, August and November, to 1.50 per cent by the end of the year.However, James Smith, economist at ING, said that “policymakers are increasingly shifting focus to the deteriorating growth backdrop” and expected “one or perhaps two more rate hikes”.The US announced on Tuesday that inflation in March was 8.5 per cent, the highest rate since 1981. More

Good morning and welcome to Europe Express.Russia’s war in Ukraine is casting a long shadow not only over the global economic outlook but also the country’s continued membership of international forums including the World Trade Organization, causing tensions in an already strained body. We’ll bring you up to speed with what WTO chief Ngozi Okonjo-Iweala had to say on how her organisation seeks to plough through, even as members barely speak to each other.Vladimir Putin, meanwhile, has said that the diplomatic efforts to resolve the conflict he started were “back to a dead end”, as western and Ukrainian intelligence continued to warn on the massive influx of weapons and troops via Belarus and Russia in preparation of what is likely to be another devastating offensive on eastern Ukraine. In the wake of the Russian troop withdrawal from the outskirts of Kyiv, over 400 bodies of civilians have been retrieved in the city of Bucha alone.As for Hungary’s 15 minutes of fame yesterday, when EU affairs ministers discussed rule of law issues in the country, we’ll bring you the latest in what the Hungarian minister had to say and what the counter-arguments were. Awkward membershipIt is not easy running a multilateral organisation during a war, World Trade Organization boss Ngozi Okonjo-Iweala admitted yesterday. The Geneva-based body forecast goods trade growth for 2022 of 3 per cent, down from its earlier prediction of 4.7 per cent, because of Russia’s invasion of Ukraine, writes Andy Bounds in Brussels.Okonjo-Iweala also explained to journalists how the body was working when some members would barely talk to each other.The EU, Canada, US, Ukraine and other countries have rescinded Russia’s most favoured nation status, meaning it must pay higher tariffs on goods in some cases. Each meeting starts with declarations by Russia or states opposed to it justifying their actions, she said.But she denied that the WTO was “paralysed”. Talks had slowed, she admitted, but were now moving forward through bilateral consultations or small groups. “We are using that approach now in all negotiations,” she said. It is not the best preparation for a long-delayed ministerial conference. Dubbed MC12, it has been postponed twice because of Covid-19, and it is now three years since the 164 members’ trade ministers met to hammer out solutions to pressing issues.On the agenda for the week of June 13 is the functioning of the WTO itself. There has been no major multilateral deal since it was created in 1995 and even its role in settling disputes is threatened by the rise of unilateral actions such as US steel tariffs and China’s boycott of Lithuanian goods.While Geneva can convene panels to hear disputes, there is no appeals body because the US refuses to co-operate. So many disputes remain unresolved.Also on the MC12 agenda are curbs to fishing and agricultural subsidies and a plan to make it easier for developing countries to waive intellectual property rules to copy Covid-19 vaccine designs.But Okonjo-Iweala admits she does not yet know whether all topics will be discussed and which could be concluded. “Various options are being explored as to what we could deliver. But that’s where we are,” she said.“But we are actively meeting them, working on that and on WTO reform. This is really very, very important. Virtually every minister I’m going to know is still harping on about the need to make progress on this.”But as evidence grows of Russian war crimes in Ukraine, so are fears that some countries may decide they do not want to attend any event where Moscow is also represented.Chart du jour: Leftist vote

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Read more here about why French president Emmanuel Macron needs to dip into the leftwing pool of voters who backed Jean-Luc Mélenchon in the first election round. Mélenchon urged his voters to reject far-right leader Marine Le Pen but he stopped short of backing Macron, and his party is due to consult members on whether to do so.When democracy cuts both waysFour election wins on the bounce, the longest-serving leader in the EU, and among the fastest growing economies in the bloc: Hungary’s justice minister swaggered into yesterday’s General Affairs Council expecting to be greeted with the envy of all her colleagues. But few were moved, writes Henry Foy in Brussels.Prime minister Viktor Orban’s barnstorming re-election this month — retaining a supermajority that other EU leaders could only dream of — has in Budapest’s eyes altered the balance of power in the continuing dispute between Hungary and the European Commission over the protection of rule of law in the country. Orban’s justice minister, Judit Varga, made that clear as the ministers arrived in Luxembourg, arguing that the “historic mandate” showed “Hungarian democracy does not share these concerns”.But her colleagues on the council had a different concept of how democracy works, citing the supremacy of rule of law and protection for minorities, regardless of the scale of ballot box victories.While Varga was “emboldened and vindicated” by the election result during the council, people briefed on the discussions told Europe Express, other ministers ventured that when the ruling party controls almost all of the country’s media, winning 52.5 per cent of the vote is not an astonishing outcome.“Rule of law also means limiting the possibility for the authorities of a member state, even if supported by . . . a large majority among the population,” Didier Reynders, the EU justice commissioner, said after the meeting.The long-running saga over Hungary’s adherence to rule of law and the EU’s efforts to tackle it will reach a milestone this month when a letter from the commission arrives on Orban’s desk informing him that it intends to activate a so-called conditionality mechanism that would curb access to some EU funds as punishment for democratic backsliding.Hungarian officials say that they are sanguine about the situation and cannot comment on the letter’s contents and import until it arrives. But Budapest’s likely defence will echo Varga’s pitch: a clear majority of our people have no problem with how we run our country — so why should we listen to you?What to watch today Belgian prime minister Alexander De Croo visits MoldovaA delegation of MEPs holds a press conference in Bulgaria after a fact-finding mission over allegations of corruption and misuse of EU fundsEuro-Latin American parliamentary assembly takes place in Buenos AiresNotable, Quotable

Steinmeier non grata: Frank-Walter Steinmeier, the German president, has abandoned plans to visit Kyiv after admitting yesterday he would not be welcome in the Ukrainian capital, in a rare snub for a western politician. Steinmeier has recently expressed regrets for his pro-Russia policy and insistence on building a second gas pipeline, Nord Stream 2.ECB ‘fantasy’: The ECB’s first chief economist, Otmar Issing, told the Financial Times in an interview that the central bank was “living in a fantasy,” misdiagnosing the factors behind the current surge in prices and playing down the danger of inflation spiralling out of control. His criticism that the ECB is being too slow to raise interest rates comes ahead of tomorrow’s governing council in Frankfurt.New commander: Alexandr Dvornikov, Russia’s newly appointed commander in Ukraine, developed his skills in military operations with brutal effect in Syria in 2015. He was leader of Russia’s southern military district, responsible for operations in Donbas since Russia annexed part of its territory eight years ago.Le Pen anxiety: While Emmanuel Macron’s lead ahead of the April 24 run-off has eased acute concerns among officials in Brussels, the potential remains for France to elect a president who wants to pull the country out of Nato’s military structures, tear up reams of EU legislation and restore relations with Putin. Boris, fined: UK prime minister Boris Johnson, his wife Carrie Johnson and chancellor Rishi Sunak have been issued with fines as part of an investigation by the Metropolitan Police into breaches of Covid-19 rules in Downing Street and Whitehall during the pandemic. More

Good morning. Tuesday’s US consumer price inflation report was surprisingly benign (see below), but markets did not celebrate. Perhaps the good news was offset by higher oil prices (see below, again). But then, one day’s trading always means less than you think. Email us: [email protected] and [email protected](er) inflation is niceThe inflation climbdown starts now. That was the Wall Street consensus after yesterday’s cooler US CPI print, and I’ve no reason to doubt it. Core inflation (that is, excluding food and energy) rose an annualised 4 per cent in March, or 0.3 per cent from February, lower than the 0.5 per cent the market expected. One reason was the long-awaited deflation in used cars:Forecasters see headline inflation, which hit 8.5 per cent in March compared with a year ago, gliding down in the next few months. Here’s Deutsche Bank’s outlook, as good a stand-in for the consensus as any:

There are two reasons for this expectation. First, price increases in crucial areas have stopped accelerating. Shelter inflation, for instance, grew at the same seasonally adjusted pace as last month, a hint that the worst is over. Services ticked up to 0.6 per cent from 0.5 per cent, but was accompanied by minus 0.5 per cent durable goods deflation — in line with the widely predicted post-pandemic rotation from goods to services. Second, base effects are kicking in. That is, big price increases a year ago mean even bigger ones are needed now to sustain 7-8 per cent year-on-year inflation. The March numbers suggest that bigger increases aren’t coming.It was just enough good news for the market to briefly gasp for breath. The 10-year/2-year yield curve spread steepened 9 basis points. Stocks rallied briefly before closing slightly down; oil cresting above $100 a barrel was the supposed explanation.The news was good — but only relative to expectations. The Ukraine commodities shock was unmissable in the red-hot headline number. Headline and core inflation diverged the most in 17 years after energy shot up 11 per cent in March alone. Within the core measure, shelter inflation, as Unhedged has noted, is likely to stick, and 7 per cent annualised is a mighty uncomfortable level to stick at. There is, in other words, more than enough to worry about, notwithstanding yesterday’s sprinkle of optimism. The Federal Reserve looks ready to shrink its balance sheet and raise interest rates in bounds, not steps. But the central bank has to keep its eyes on the data. It won’t want to tighten into an economic slowdown that is happening anyway, and there are hints that it might be. The withering rise in mortgage rates — nearing 5 per cent nationally — is the growth headwind we’ve been watching most closely. Fiscal policy is another. The Brookings Institution estimates the first-quarter fiscal drag on growth at minus 2.1 percentage points. BlackRock’s Rick Rieder points out that inflation itself is a damper on growth. Food, energy and shelter — some of the fastest-inflating categories — make up 62 per cent of total consumption. More money spent on essentials means less for everything else.But we’ll take the good news. Inflation that falls a little faster than expected, if the trend continues, will make the Fed pulling off a soft landing a touch more likely. It’s nice, even if we are not anywhere close to out of the woods. (Ethan Wu)Martijn Rats on oilAbout a month ago, we spoke to perhaps the most prominent bear in the oil markets, Citi’s Ed Morse. He made the case for falling oil prices, based on the following premises:Current high demand is evidence of a recovery, not secular strength in the economy.The war in Russia is unlikely to disrupt supply as much as the markets expect. US shale fields are going to produce more than the market expects.Producers around the world are responding to higher prices with expanded production. Yesterday I had a conversation with Martijn Rats of Morgan Stanley, who takes a much more bullish view on the oil price. He thinks the transition to solar will take longer than many expect, and that oil demand, correspondingly, is set to stay strong for a while. He made several points investors with energy exposure will want to keep in mind. The oil market is not sending clear price signals right now. “The volatility has been hard to stomach,” Rats said, and has driven financial speculators and traders out of the market, in flight from prohibitively high hedging and margin costs. This is a bad thing. “Speculators provide risk capacity to the market — they absorb risk from the market, for a fee. They take a view on price and value, rather than being pure sellers [like oil producers] or pure buyers [like, for example, airlines].” Without them, the market struggles to settle on a price range. $100 oil is not expensive enough to destroy demand. “All the product markets — diesel, gasoline — are very tight. That does not say demand destruction. That says people are willing to pay.” Rats also pointed out that $100 oil implies that about 3-4 per cent of gross domestic product would be spent on energy, a historically normal or even slightly low level.The oil price may not be pricing in the impact of lower Russian oil exports, even without European sanctions on oil. “There is an idea out there that only Europe is not buying Urals [oil piped from Russia]. But look at Espo [Eastern Siberia to Pacific] prices — they are at a big discount to Dubai [the Asian regional benchmark], too.” That discount, on oil piped east from Russia, is bigger than weak demand due to the Chinese shutdowns can explain, Rats said. “This suggests the Chinese refineries are also not that keen on the Russian crude.”He estimates that the logistical frictions involved in shifting Russian exports from Europe to markets that are keen, such as India, will cost Russia perhaps 1mn barrels a day of exports, out of a total of 7mn-8mn. He is surprised that market consensus expects a much larger slump in Russian exports, even without direct sanctions — about 3mn barrels a day. “The market has not priced 3mn barrels in,” he said, noting that a 1mn barrel disruption in supply from Libya in 2011 was enough to move the market by $30 a barrel. If sanctions are added on top of the frictional declines? The price impact would be difficult to estimate, he said. But very big.One good readWe’re late to this, but the FT’s John Thornhill wrote an excellent piece on what he learned running a start-up. More

One of the world’s largest electronics manufacturing hubs near Shanghai is grinding to a halt, aggravating China’s economic worries and exacerbating disruption to global supply chains.Dozens of producers of crucial electronic components on Wednesday halted production at their factories in Kunshan, a city close to Shanghai. Companies and analysts said the shutdown was unavoidable after lockdown rules initially applied only in Shanghai were extended to Kunshan. “The situation in Kunshan changed overnight. While factories there could previously operate under so-called ‘static management’, they are now switching to a system like in Shanghai, where individual areas are categorised as closed, restricted or protected depending on when they registered infections for the last time,” said Patrick Chen, head of research at CLSA, a brokerage, in Taipei. The production disruptions have heightened risks for China’s slowing economy. On Monday, Premier Li Keqiang warned for the third time in a week of the dangers that pandemic control measures posed to the economy.Official data showed new cases reached a record high in Shanghai on Tuesday after falling a day earlier. There were 26,330 positive cases in the city, which is under a vast lockdown in a bid to halt China’s worst outbreak of the virus in two years.Authorities laid out a blueprint for easing some measures by allowing residential compounds with no cases over the previous fortnight to reopen. But lockdown restrictions remain in place across large portions of China’s largest city, where residents have complained of difficulties in ordering food online. The US state department this week ordered non-essential consular staff to leave Shanghai.The lockdown has also affected trucking companies, sparking warnings of a deeper impact on global trade. Shanghai port, however, has remained operational through a so-called closed-loop system, where workers remain on site. Economists at Nomura estimated that 45 cities and 373mn people in China were under full or partial lockdown, compared with 23 cities and 193mn people a week ago.In a sign of growing pressures on trade, imports into China fell in dollar terms in March on a year-on-year basis for the first time since August 2020. Exports rose 15 per cent.Production delays in the electronics industry make it just the latest sector to be hit by the restrictions. Electric carmaker Nio said over the weekend that suppliers in Shanghai and elsewhere had halted production and that it would suspend deliveries. On Wednesday, more than 30 Taiwanese electronics manufacturers announced closures of factories close to Shanghai.WUS, a leading printed circuit maker, said two of its Kunshan-based subsidiaries had suspended production. LCD backlight manufacturer Coretronic announced a week-long production stop at its Kunshan plant, while Wise Pioneer, a supplier of machinery for making electronics products such as flat screens and lenses, said it was extending a production halt for another week.

Contract electronics manufacturer Pegatron, which assembles some iPhone models for Apple, suspended production at two plants in Shanghai and Kunshan on Tuesday.Analysts said the stoppages risked worsening component shortages.“Even if some companies are allowed to continue production, their utilisation rates have fallen to between 40 and 60 per cent. Raw materials can’t be moved in and finished products can’t be moved out,” Chen said.Analysts expected supplies of printed circuit boards, a component used in almost every electronics gadget, as well as of casings for smartphones and laptops, would be affected most by the factory shutdowns. The impact on Apple was expected to be limited because demand for the iPhone models Pegatron assembles, the 13 mini and the SE3, have been sluggish and production for the iPhone 14 was only set to rise late in the third quarter. More

New Zealand’s central bank raised interest rates by half a percentage point on Wednesday, its biggest increase in 22 years, following worries about surging inflation exacerbated by Russia’s invasion of Ukraine.The Reserve Bank of New Zealand increased its official interest rate by 50 basis points to 1.5 per cent, bringing forward a rise that it had flagged would be made this year.The decision was announced a day after the US reported that inflation hit 8.5 per cent in March, growing at its fastest pace in 40 years, as supply chains struggled to keep up with a post-pandemic surge in demand and the war in Ukraine boosted commodity prices.The RBNZ monetary policy committee met on February 23, the day before Russia invaded Ukraine, and raised rates by 25 basis points. It also forecast further tightening in 2022.But the committee said it had brought forward its decision in response to “rising inflation expectations”. The most recent inflation figure, from December 2021, was 5.9 per cent, up from 1.4 per cent a year earlier. The committee expects inflation to peak at 7 per cent in the first half of 2022.“The level of global economic activity continues to generate rising inflation pressures, exacerbated by ongoing supply disruptions in large part driven by Covid-19,” the monetary policy committee said. “The Russian invasion of Ukraine has significantly added to these supply disruptions, causing prices to spike in internationally traded commodities and energy.”New Zealand began increasing rates by increments of 25 basis points in October last year, after holding the official cash rate at 0.25 per cent for 18 months. Wednesday’s rate rise coincided with New Zealand opening its borders to Australian tourists for the first time since a brief “travel bubble” operated between the countries in 2021 before new coronavirus outbreaks prompted Wellington to shut its borders again.Saul Eslake, an Australian economist, said New Zealand’s rise “underscores the seriousness with which they view the near-term inflation outlook and their determination to rein it” and expected another 50 basis points rise next month.

Along with global inflationary pressures, Eslake said the RBNZ was responding to a tight employment market, a low target inflation rate and a mandate to consider house prices in monetary policy decisions. Richard Yetsenga, chief economist at ANZ, said the RBNZ was “playing catch-up” with unexpectedly rapid inflation and also forecast the bank would raise rates by the same amount next month. “New Zealand is showing a pattern of tending to get more aggressive as the cycle goes on,” he said. “One of the elements [of today’s announcement] seems to be a signal that by lifting 50 basis points now, hopefully that reduces the amount they need to hike over the cycle.”Australia, New Zealand’s second-biggest trading partner, has kept interest rates on hold at a record low of 0.1 per cent, but has signalled that it would raise rates within the next few months even though inflation is low by global standards, at 3.5 per cent.Eslake said he expected the Reserve Bank of Australia to raise rates in June, adding that the country had been partly insulated from price rises by weak wage growth and an economy that relies on domestic coal rather than imported gas and therefore was not subject to the energy price jumps observed in Europe. More

A top Federal Reserve official has warned it is a “fantasy” to think the US central bank can bring inflation down sufficiently without raising interest rates to a level where they constrain the economy. James Bullard, president of the St Louis branch of the Fed, said the central bank needed to be more aggressive in its efforts to root out the highest inflation in four decades as he called for rates to rise to a point where they actively curtail growth. The comments from Bullard, a voting member of the policy-setting Federal Open Market Committee and one of its foremost hawks, run counter to other officials, who are broadly aligned on the need to push rates closer to a “neutral” level this year. That is the level at which rates neither fuel nor restrict economic activity and is estimated to be around 2.4 per cent. Bullard said the central bank would need to get beyond that threshold as quickly as possible this year if it wanted to bring inflation closer to the Fed’s longstanding 2 per cent target. “There’s a bit of a fantasy, I think, in current policy in central banks,” Bullard said in an interview with the Financial Times. “Neutral is not putting downward pressure on inflation. It’s just ceasing to put upward pressure on inflation.”“We have to put downward pressure on the component of inflation that we think is persistent,” he added. “Getting to neutral isn’t going to be enough it doesn’t look like, because while some of the inflation may moderate naturally . . . there will be a component of it which won’t.”His comments come on the heels of new inflation data that showed consumer prices increased at an annual rate of 8.5 per cent in March following a surge in energy and fuel costs driven by Russia’s invasion of Ukraine. “Core” inflation, which strips out volatile items such as food and energy, came in slightly lower than expected, but Bullard warned it would not come down without a concerted effort from the Fed and that the US was vulnerable to unforeseen shocks that could further stoke prices. “This [inflation] report just underscores the urgency that the Fed is behind the curve and needs to get moving,” he said. Bullard supports the Fed raising rates by half a percentage point at the next policy meeting in May, something he urged the FOMC to do at its gathering in March, when it raised them by a quarter-point. More officials now back such a move, as well as a reduction in the size of the Fed’s $9tn balance sheet soon.He said the Fed’s benchmark policy rate should move up “sharply” after the May meeting and endorsed a 3 percentage point increase in the federal funds rate from its current range of 0.25 per cent to 0.50 per cent by the third quarter. Bullard acknowledged that such a level was “aspirational” in such a short period of time, but warned the Fed’s credibility would be on the line if it did not take action. “If markets and households get the idea that the Fed’s not going to do the right thing and not going to keep inflation under control, then you have to gain credibility by actually doing things that show them that you are serious,” he said. Bullard pointed to former Fed chair Paul Volcker’s decision to raise rates to 20 per cent at one point in the early 1980s, which did contain inflation but resulted in a sharp economic contraction that resulted in millions of job losses. Volcker had no choice other than implementing such a large increase “because the committee didn’t have enough credibility”, Bullard added.“So far I think we’re holding on to our credibility, but if it slips away, then it’s going to be much more difficult to keep inflation under control going forward.”Still, Bullard said he was optimistic the Fed would be able to cool down the economy without causing a recession — as it did in 1994. More