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Portfolio > Economy & Markets > Fixed Income

Fed’s Bullard Backs Supersized Hike, Seeks Full Point by July 1

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Federal Reserve Bank of St. Louis President James Bullard said he supports raising interest rates by a full percentage point by the start of July — including the first half-point hike since 2000 — in response to the hottest inflation in four decades.

“I’d like to see 100 basis points in the bag by July 1,” Bullard, a voter on monetary policy this year, said in an interview with Bloomberg News on Thursday. “I was already more hawkish but I have pulled up dramatically what I think the committee should do.”

For now, Bullard’s plan involves spreading the increases over three meetings, shrinking the Fed’s balance sheet starting in the second quarter, and then deciding on the path of rates in the second half based on updated data.

He said he was undecided on whether the March meeting should begin with 50 basis points, and would defer to Fed Chair Jerome Powell in leading the discussion. Powell, at a press conference in January, didn’t rule out the idea of such a move.

Bullard spoke after the January consumer price index report showed a 7.5% annual increase, the biggest since 1982. Gains were broad-based, extending beyond food and energy to categories including household furnishings and health insurance.

Yields on two-year Treasuries, which had risen after the CPI print, climbed further after Bullard’s comments to reach about 1.56%, the highest since January 2020, while 10-year yields rose to about 2.04%, the highest since August 2019. Fed swaps now show a full point of tightening over the next three meetings.

‘Concerning’ Report

The report “shows continued inflationary pressure in the U.S.” and “is concerning for me and for the Fed,” Bullard said. “You have got the highest inflation in 40 years and I think we are going to have to be far more nimble and far more reactive to data.”

The St. Louis Fed chief raised the possibility of the Fed at some point considering a move in between scheduled meetings. For now, he highlighted that policy makers are focused on the March 15-16 meeting, and have committed to finishing asset purchases before kicking off rate increases.

“There was a time when the committee would have reacted to something like this to having a meeting right now and doing 25 basis points right now,” Bullard said. “I think we should be nimble and considering that kind of thing.”

Investors have raised bets on the pace of rate hikes since the January meeting of the Federal Open Market Committee, shifting to roughly six this year versus the three that officials forecast in December. In the wake of the CPI report, markets are split about evenly on the possibility of a 50 basis-point increase in March.

Other Fed officials have expressed general support for moving gradually, and Bullard himself gave a speech a decade ago in which he said a “shock and awe” approach was rarely warranted. But on Thursday, he said the surprisingly high inflation data from October to January calls for a response.

“I do not think it is shock and awe,” Bullard said, noting that markets are already pricing in significant moves. “I think it is a sensible response to a surprise inflationary shock that we got during 2021 that we did not expect.”

Asset Sales

The Fed is currently scheduled to end its asset-purchase program in early March, ahead of the policy meeting. Powell said discussions over shrinking the balance sheet will be held in upcoming gatherings.

Bullard said he would favor significant reductions relative to the pace the Fed was adding to its securities. Prior to its shift to tapering late last year, the Fed was adding a cumulative $120 billion a month in Treasuries and mortgage-backed securities.

“As a general principle, I see no reason why you can’t remove accommodation just as fast as you added accommodation, especially in an environment where you have the highest inflation in 40 years,” Bullard said.

While the program will likely begin with just a runoff of maturing securities, Bullard said he would favor a second phase to the program as a contingency.

“That second part might involve asset sales,” he said. “I would very much like the committee to consider that as a possibility, so we can do that if we need to — because inflation is not decelerating as we had hoped.”

(Photographer: Joshua Roberts/Bloomberg)

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