James Bullard

David Orrell | CNBC

St. Louis Fed President James Bullard said Friday he thinks the central bank will need to raise interest rates the equivalent of 12 times this year to convince the public that fighting inflation is serious.

As the lone dissident at the Federal Reserve’s meeting this week, Bullard said in a statement that he would like to see the central bank benchmark interest rate rise above 3% from the near 0% level where it had stood.

“This would quickly adjust the key rate to a more appropriate level for the current circumstances,” he said.

After its two-day meeting, the Federal Open Market Committee said on Wednesday it would raise bank overnight interest rates by 0.25 percentage points, historically the typical hike with which the FOMC moves. The accompanying economic projections indicated a path this year that would amount to the equivalent of seven rate hikes, or 1.75 percentage points.

This move marked the Fed’s first rate hike since December 2018 and came in response to a staggering rise in inflation that has seen prices rise at the fastest pace in 40 years.

Bullard was the only FOMC member to vote against the move, stating that he would have preferred a 0.5 percentage point or 50 basis point rate hike. He added that the Fed should also have started cutting the nearly $9 trillion in bonds it has amassed over the past 14 years.

In his statement Friday, Bullard said inflation hurts the people the Fed tries most to help, namely those at the bottom of the economic ladder.

“The burden of excessive inflation is particularly heavy for those with modest incomes and wealth and those with limited options to adapt to the rising cost of living,” he said. “The combination of strong real economic performance and unexpectedly high inflation means that the Committee’s key interest rate is currently far too low to be cautious about the macroeconomic situation in the US.”

Fed officials were generally divided on how to handle interest rates this year.

Ten members expected a fed funds rate of 1.75%-2% by the end of the year, but eight said it should be higher. The highest “dot” on the commission’s dot plot, believed to be Bullard’s, indicated a range of 3 to 3.25%.

He pointed out that the Fed had been aggressive in tackling that before, in 1994-95, to counteract a resurgent economy and a gradual rise in inflation.

“The results were excellent,” Bullard said. “The commission achieved an average inflation rate of 2% and the US economy boomed in the second half of the 1990s. I think in the current environment the commission should try to achieve a similar result.”

On the issue of the Fed’s balance sheet, Bullard gave no details on what he thinks the central bank should do, only saying that “a plan” at this week’s meeting would have been appropriate.

The statement after the meeting indicated that the committee “expects to begin reducing its holdings of treasury bills and agency debt and mortgage-backed agency securities at an upcoming meeting.” Fed Chair Jerome Powell said afterwards that the process could start as early as May.


This post St. Louis Fed’s Bullard Says Central Bank Should Raise Rates Above 3% This Year was original published at “https://www.cnbc.com/2022/03/18/st-louis-feds-bullard-says-the-central-bank-should-raise-rates-above-3percent-this-year.html”

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