Fed Official Suggests Central Bank Is Fueling Inflation By Not Raising Rates 'Aggressively'

Topline

Federal Reserve Bank of St. Louis President James Bullard said on Tuesday the central bank should move aggressively in reversing its pandemic-era stimulus measures in order to stop fueling already-high levels of inflation, adding to a chorus of experts suggesting the Fed may hike interest rates more than expected despite concerns that doing so could slow down the economy.

“Faster is better,” Fed President James Bullard said when asked how quickly the Fed should hike … [+] interest rates, playing down concerns that overly aggressive hikes could stunt economic growth.

Key Facts

The Fed “needs to move aggressively to keep inflation under control,” hawkish official Bullard said Tuesday on Bloomberg Television, suggesting monetary policy, which has remained accommodative during the pandemic to encourage economic growth, “needs to get neutral at least” to not put upward pressure on inflation.

“Faster is better,” the official said when asked how quickly the Fed should hike interest rates, playing down concerns that overly aggressive hikes could slow economic growth and spark a recession, and instead calling for a half-point increase at the next meeting in May—double the 25-basis-point hike most economists have projected.

Bullard’s comments come one day after Fed Chair Jerome Powell said there is an “obvious need to move expeditiously… to restore price stability,” acknowledging inflation is “much too high” and pledging to take the necessary steps to combat the price surge, even if that means backing a half-point hike that every Fed official except Bullard rejected last week.

Powell’s remarks immediately dragged down the broader stock market as investors priced in the growing likelihood of a 50-basis-point hike in May, with Goldman Sachs economists writing in a note to clients that Powell’s shift in wording from “steadily” in January to “expeditiously” on Monday “strikes us as significant.”

Led by Jan Hatzius, the Goldman economists upped their forecast to include two half-point hikes in May and June, followed by 25-basis-point hikes at the four remaining meetings this year; they previously projected six hikes of 25 basis points each—already more than double the three hikes many Fed officials projected at the start of the year.

The Fed’s Federal Open Market Committee last week voted 8 to 1 to raise rates by 25 basis points for the first time since 2018.

Chief Critic

“Elevated levels of uncertainty are front-forward in my mind and have tempered my confidence that an extremely aggressive rate path is appropriate today,” Atlanta Fed President Raphael Bostic said in a speech Monday, citing a tight labor market and Russia’s invasion of Ukraine as key drivers of uncertainty. The historically dovish official said he forecasts six rate hikes in 2022 and two more in 2023, but acknowledged his projections trend “toward the bottom of the distribution” relative to his colleagues.

Key Background

Rising energy prices have elevated inflation readings during the pandemic to the highest level in four decades, and stocks have struggled in recent months as Fed officials work to combat the surge by unwinding the central bank’s pandemic-era stimulus measures. After rising 27% in 2021, the benchmark S&P 500 has tumbled 6% this year. In a note to clients this month, Bank of America’s Ethan Harris said he worries stronger-than-anticipated Fed tightening, combined with an oil price shock or other unforeseen event, would pose a “serious risk” of a recession. Meanwhile, Powell and other officials overseeing monetary policy have maintained that the expected hikes will achieve disinflation without stunting growth or increasing unemployment substantially.

What We Don’t Know

The central bank’s next two-day policy meeting concludes on May 4, when officials are expected to announce by how much they’ll raise interest rates.

Fed Official Suggests Central Bank Is Fueling Inflation By Not Raising Rates ‘Aggressively’

Topline

Key Facts

Chief Critic

Key Background

What We Don’t Know

Further Reading