Fri. Jan 21st, 2022

James Bullard, president of the Federal Reserve Bank of St. Louis, also said the US Federal Reserve could next shrink its balance sheet.

By Bloomberg

Federal Reserve policymakers could begin raising their target interest rate as soon as March and shrinking the central bank’s balance sheet as a next step in response to rising inflation, said James Bullard, president of the Federal Reserve Bank of St. Louis. Louis, said.

“The FOMC can start raising the policy rate as early as the March meeting to be in a better position to control inflation,” Bullard, referring to the Federal Open Market Committee, said in comments prepared for delivery to the CFA Society St. Louis on Thursday. “Subsequent rate hikes during 2022 may be pushed forward or backward, depending on inflationary developments.”

Bullard, who was recently one of the most hawkish policymakers, endorsed the policy committee’s pivot to fight rising prices at last month’s meeting. Fed policymakers believed a stronger economy and higher inflation could justify rate hikes “sooner or at a faster pace” than they had previously expected, according to minutes of the December 14-15 policy meeting released on Wednesday.

In December, the FOMC announced that it would shut down the Fed’s bond buying program at a faster pace than was first outlined at its previous meeting in early November, citing rising risks of inflation, at a pace that purchases in March end. The meeting also included discussion on the reduction of the balance sheet by not reinvesting maturing securities, although no decisions on timing were made.

Chart following the rise in the Federal Reserve's balance sheet of less than $ 1 trillion in 2006 to its current level of $ 8.75 trillion.

“Asset purchases will come to an end in the coming months, but the FOMC may also choose to allow passive balance sheet runoff to reduce monetary accommodation at an appropriate rate,” Bullard said, describing the balance sheet movement as one of the “possible next steps” for policy.

Bullard’s remarks were more false than those of San Francisco Fed President Mary Daly, who on a separate occasion said she preferred taper acceleration but did not comment on the subsequent shrinking balance sheet. “It’s a very different conversation than reducing our balance sheet; it would come after we have already started to normalize the Fed fund rate, ”she said.

Bullard, who is voting on monetary policy this year, said the committee was responding to an “inflation shock”, with price increases at the highest level in several decades, and drastically higher than policymakers expected a year ago.

“With the real economy strong but inflation far above target, US monetary policy has shifted to combat inflationary pressures more directly,” Bullard said.

Bullard gave an upbeat view of the US economic outlook, saying he was looking for growth “at a rate above trend” as the economy responded to fiscal and monetary support. He suggested that he does not see too much risk of the omicron variant, noting that confirmed cases in South Africa have peaked and are declining and the US may follow that pattern.

The St. Louis Fed official was sometimes a bellwether for the Fed, and was the first policymaker to suggest that the decline in bond purchases should be accelerated and finalized by March to give officials flexibility to raise interest rates sooner than they had . plan.

–With the help of Olivia Rockeman.

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