Federal Reserve Bank of St. Louis President James Bullard said the Fed needs to act quickly in raising interest rate to around 3.5% this year along with multiple half-point hikes also it shouldn’t rule out rate hike by 75 basis points.
In a virtual presentation to the Council of Foreign Relations on Monday Bullard said, “more than 50 basis points is not my base case at this point,”. He also added Fed under Alan Greenspan did such a hike in 1994 leading to a decade-long expansion. “I wouldn’t rule it out, but it is not my base case here.”
Earlier Fed Chair Jerome Powell said a 50 basis-point increase is possible at the Fed’s May 3-4 meeting.
Bullard reiterated that he favors an interest rate of about 3.5%, citing a version of the Taylor rule, a guideline developed by Stanford University’s John Taylor that uses inflation, the unemployment rate and an estimate of the neutral interest rate which implies to rate neither contractionary nor expansionary.
“You can’t do it all at once, but I think it behooves us to get to that level by the end of the year,” Bullard said.
Bullard added that the Fed’s Open Market Committee’s goal should be getting to a neutral rate soon. The committee estimates a rate of about 2.4%.
“We want to get to neutral expeditiously, I guess is the word of the day,” he said, repeating a word used by a number of colleagues.
“I’ve even said we want to get above neutral as early as the third quarter and try to put further downward pressure on inflation at that point.”
His remarks included that a talk about recession was premature with Fed just raising rates only once at this point. He foresees the economy to grow at a healthy rate in excess of its long-term trend both in 2022 and 2023, adding he expects unemployment to fall below 3%.
Fed minutes of the March meeting showed many Fed members favored raising interest rates by a half point but only opted for a cautious 25-basis point increase amid uncertainty around war in Ukraine.
The meeting minutes also showed that officials at Fed planned to shrink balance sheet by $95 billion a month or more than $1 trillion a year which could see its announcement in May. Governor Lael Brainard said April 12 that could mean roll-off as soon as June.
Bullard’s hawkishness could yet prove to be a defining pivot for Fed policy makers, said Stephen Innes, managing partner at SPI Asset Management as reported by Bloomberg.
“The fact that Bullard is talking about a seventy-five basis point hike suggests other hawks are on the same page,” he said.