Fed’s Bullard says rates should top 3% this year to combat inflation

A top Federal Reserve official has called for the US central bank to raise its benchmark interest rate above 3 per cent this year, arguing that policymakers need to move quickly to combat inflation and avoid “losing credibility”.

James Bullard, president of the St Louis branch was the lone dissenter at the Fed’s meeting this week, when the central bank raised rates for the first time since 2018 in what officials signalled would be the start of a series of increases at all of the remaining six meetings this year. At that pace, the fed funds rate would rise to 1.9 per cent.

In a statement released on Friday, Bullard, a voting member of the policy-setting Federal Open Market Committee, said a half-point rate rise — a tool that has not been used since 2000 — would have been “more appropriate” than the Fed’s quarter-point increase, given the strength of the labour market and broader economy, as well as the “excessive” level of inflation. At 5.2 per cent, the Fed’s preferred core personal consumption expenditures index is well above the central bank’s 2 per cent target.

“In my judgment, given this constellation of macroeconomic data, a 50-basis-point upward adjustment to the policy rate would have been a better decision for this meeting,” he said.

Bullard was joined by a number of other Fed officials on Friday in outlining how central bank should tackle the US’s highest inflation in 40 years. While policymakers expressed different levels of tolerance for how aggressively the central bank should raise rates, they were aligned in their confidence that the forthcoming tightening cycle will not cause a sharp economic contraction.

Christopher Waller, a Fed governor, said in an interview with CNBC on Friday that though data were “screaming” for a half-point move this week, geopolitical tensions justified proceeding with “caution”.

However, he backed a “front-loading” of interest rate increases this year, which he said implied half-point rate rises “at one or multiple meetings in the near future”.

“It’s better to have a strategy of ‘just do it’ on the rate hikes rather than ‘just promises’,” said Waller, adding that he would like the policy rate above a range of 2 per cent to 2.25 per cent by the end of the year.

A bulk of the 16 policymakers who pencilled in their forecasts on Wednesday did express support for more aggressive action, with seven projecting rates to rise above 2 per cent in 2022. That would require at least one half-point adjustment.

Underscoring the wide range of policymakers’ views, however, Neel Kashkari, president of the Minneapolis branch and one of the most dovish officials, said on Friday the policy rate should not exceed 2 per cent by year-end, in large part because demand and supply imbalances are “still transitory”.

Most officials saw rates rising to 2.8 per cent in 2023, slightly higher than the level a majority of policymakers believe will neither hasten nor hold…