A top Federal Reserve official has called on the US central bank to raise interest rates above 3 percent this year, arguing that policymakers must act quickly to fight inflation and avoid “losing credibility”.

James Bullard, president of the St. Louis branch, was the only one to disagree at the Fed’s meeting this week when the central bank raised interest rates for the first time since 2018 in what officials say would be the beginning of a recession. series of increases in all remaining six meetings this year. At that rate, the fed funds rate would rise to 1.9 percent.

In a statement released Friday, Bullard, a voting member of the policy-making Federal Open Market Committee, said a half-point rate hike — a tool not used since 2000 — would have been “more appropriate” than the Fed’s rate hike. a quarter-point increase, given the strength of the labor market and the wider economy, as well as the “excessive” level of inflation. At 5.2 percent, the Fed’s preferred core personal consumer spending index is well above the central bank’s 2 percent target.

“In my view, given this constellation of macroeconomic data, a 50 basis point upward adjustment in key rates would have been a better decision for this meeting,” he said.

Bullard was joined by a number of other Fed officials on Friday to outline how the central bank should tackle the US’s highest inflation rate in 40 years. While policymakers expressed varying tolerance levels for how aggressively the central bank should raise interest rates, they were aligned in their confidence that the coming tightening cycle will not trigger a sharp economic contraction.

Christopher Waller, a Fed governor, said in an interview with CNBC on Friday that while the data this week “screamed” for a half-point move, geopolitical tensions warranted a “cautious” move.

However, he supported a “front-loading” of rate hikes this year, which he said implied half-point rate hikes “at one or more meetings in the near future.”

“It’s better to have a strategy of ‘just doing it’ on the rate hikes rather than having ‘just promises’,” Waller said, adding that he would like the key rate to be above a range by the end. 2 percent to 2.25 percent would come. of the year.

FOMC projections for the midpoint of US interest rates from March 2021 to September, December and March 2022

Many of the 16 policymakers writing in their forecasts on Wednesday expressed support for more aggressive action, with seven forecasts to rise above 2 percent by 2022. That would require an adjustment of at least half a point.

Underscoring the wide range of views expressed by policymakers, however, Neel Kashkari, president of the Minneapolis branch and one of its most moderate officials, said on Friday that the key rate should not exceed 2 percent by the end of the year, largely because demand and supply imbalances are “transient”.

Most officials saw interest rates rise to 2.8 percent in 2023, slightly above the level the majority of policymakers believe will not accelerate or slow growth, otherwise known as the neutral rate, which they were locked in at 2.4. per cent.

Bullard noted Friday that US monetary policy had “unconsciously eased” as mounting price pressures have pushed short-term “real” or inflation-adjusted rates downward and kept them well in negative territory. At these levels, interest rates remain very stimulative, encouraging borrowing and the very demand that the Fed is trying to dampen.

“The combination of strong real economic performance and unexpectedly high inflation means that the commission’s policy rate is currently far too low to be prudent in the US macroeconomic situation,” he said. “The commission will have to act quickly to address this situation or risk losing the credibility of its inflation target.”

Fed chairman Jay Powell has kept the door open for half-point adjustments and raising rates above neutral in his bid to prove that the commission is “well aware of the need to bring the economy back.” to price stability and is determined to use our tools to do just that”.

Bullard said he also preferred the central bank implementing a plan this week to begin reducing the size of its $9 trillion balance sheet, a process Powell said would be completed by May.

Waller wants the “run-off,” or process by which the Fed stops reinvesting maturing securities, to begin before the July policy meeting and go much faster than the previous effort in 2017. “We are in a position where we can actually pull a large volume of liquidity out of the system without really doing much damage.”

Waller also backed down concerns that the Fed could soon trigger a recession with its plans to tighten monetary policy, echoing Powell’s comments at a post-meeting press conference that the economy is robust enough to withstand higher interest rates. .

Richmond Fed president Thomas Barkin also expressed confidence that the central bank would avoid a painful contraction.

“Rather than thinking of the coming cycle of rate hikes as a harbinger of a coming recession, take it as an indication that the extraordinary support of the pandemic era is waning,” he said Friday.


This post Fed’s Bullard says rates need to top 3% this year to fight inflation was original published at “https://www.ft.com/content/3e4b6a89-1c50-4f5c-856e-4220a9da0fac”

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