David Orrel | CNBC
St. Louis Fed Chairman James Bullard said Friday he thinks the central bank should raise interest rates by the equivalent of 12 times this year to convince the public that it is serious about fighting inflation.
As the only dissident at this week’s Fed meeting, Bullard said in a statement that he would like to see the central bank’s benchmark interest rate rise by more than 3% from its near 0% level.
“This would quickly adjust the policy rate to a level more appropriate for the current circumstances,” he said.
Following its two-day meeting, the Federal Open Market Committee on Wednesday said it would raise overnight rates for banks by 0.25 percentage points, historically the typical increase the FOMC moves with. The accompanying economic projections have pointed to a path this year that would see the equivalent of seven rate hikes, or 1.75 percentage points.
The move was the first time the Fed has raised its rate since December 2018 and came in response to a dramatic 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, saying he would have preferred a rate hike of 0.5 percentage points, or 50 basis points. He added that the Fed should also have started the process of reducing the nearly $ 9 trillion in bonds accumulated over the past 14 years.
In his statement on Friday, he said inflation is hurting the people the Fed is trying to help the most, especially those at the lower end of the economic ladder.
“The burden of excessive inflation is particularly heavy on people with modest income and wealth and those with limited ability to adapt to a rising cost of living,” he said. “The combination of strong real economic performance and unexpectedly high inflation means that the Committee’s benchmark rate is currently too low to manage the US macroeconomic situation prudently.”
Fed officials overall were divided on how to proceed with rates this year.
Ten members set a federal funds rate of 1.75% -2% by the end of the year, but eight said it should be higher. The highest “point” on the committee’s dot plot, presumably Bullard’s, indicated a range between 3% and 3.25%.
He pointed out that the Fed had moved aggressively earlier, in 1994-95, to combat a booming economy and a gradual rise in inflation.
“The results have been excellent,” said Bullard. “The Committee achieved inflation of 2% on average and the US economy exploded in the second half of the 1990s. I think the Committee should try to achieve a similar result in the current environment.”
On the issue of the Fed’s balance sheet, Bullard did not give details of what he believes the central bank should be, saying only that “a plan” at this week’s meeting would be appropriate.
The statement following the meeting indicated that the committee “expects to begin reducing its holdings in Treasury and agency debt and agency mortgage-backed securities at a forthcoming meeting.” Fed Chairman Jerome Powell later said the process could start in May.