St. Louis Federal Reserve President James Bullard is pushing back on his colleagues and arguing that the central bank should move much more aggressively to rein in the country’s explosive inflation.
Bullard, who has been calling for tighter monetary policy for some time, released a statement on Friday explaining why he, alone, dissented during this week’s meeting of the Federal Open Market Committee. The committee voted to raise its interest rate target by a quarter percentage point, but Bullard said the target should have been increased to half a percentage point, or 50 basis points.
Bullard said that the U.S. economy has proven “especially resilient” despite the COVID-19 pandemic. He also said that, despite Russia’s war in Ukraine and other geopolitical headwinds, the economy is set to grow at a pace “comfortably above its long-run potential growth rate” this year and in 2023.
Fed officials forecast 2.8% gross domestic product, adjusted for inflation, in 2022, less than projected in December but still in line with the years preceding 2020, when the health crisis began wreaking havoc on the global economy.
FED ANNOUNCES FIRST INTEREST RATE HIKE IN YEARS AS INFLATION LOOMS LARGE
Additionally, the economy once again exceeded expectations and notched 678,000 more jobs in February, a promising sign that the labor market is returning to its pre-pandemic strength. The unemployment rate ticked down to 3.8%, according to the Bureau of Labor Statistics, the lowest since the start of the pandemic.
Bullard noted that despite the economic growth, inflation has risen to levels not seen since the early 1980s. Consumer prices increased by 7.9% for the 12 months ending in February, an increase from the month before.
The Fed has a narrow dual mandate: achieving maximum employment and maintaining price stability — that is, keeping inflation in check. Because economic expansion has been exceeding expectations, the Fed is now focused on tamping down inflation, and its main tool to do that is the federal funds rate.
“The combination of strong real economic performance and unexpectedly high inflation means that the Committee’s policy rate is currently far too low to prudently manage the U.S. macroeconomic situation,” Bullard said on Friday. “Moreover, U.S. monetary policy has been unwittingly easing further because inflation has risen sharply while the policy rate has remained very low, pushing short-term real interest rates lower.”
Fed officials, as a group, indicated after Wednesday’s meeting that they expect between six and eight rate hikes over the course of 2022 — a much higher number than the three rate increases that they projected during the last quarter.
Bullard, on the other hand, said he is looking for at least a dozen rate hikes this year in order to move aggressively against the growing inflation. He said he envisions the central bank raising the Fed’s interest rate target to 3%, a big step up from the near-zero level it had been at since the start of the pandemic, when the Fed intervened with unprecedented easing.
If the Fed had decided to conduct a half-percentage-point hike this week right out of the gate, it would have been essentially equivalent to pursuing two rate hikes at once, an aggressive tactic that hasn’t been deployed in more than two decades.
Some economists are in Bullard’s camp. They argue that the Fed is badly lagging in raising interest rates and winding down its balance sheet in light of the higher prices.
CLICK HERE TO READ MORE FROM THE WASHINGTON EXAMINER
“It’s not enough. One has got to remember that they are starting from zero, so they are pushing the [rate] up to 0.25% when inflation is running at 7%, so they’re very far behind the curve,” Desmond Lachman, a senior fellow at the American Enterprise Institute, told the Washington Examiner in advance of this week’s decision.
This week’s move to raise the interest rate target, and the subsequent hikes expected for the rest of the year, will translate to higher rates on consumer finance products, such as car loans, student loans, and credit cards.
