– Fed Has ‘Long Ways To Go” To Hike Rates; Should Move Faster Than In Past
– After Starting ‘Passive Runoff’ Of Balance Sheet May Need To Sell Assets
– Despite Ukraine, U.S. Economy Will Grow Above Potential, Further Reduce Unemployment
By Steven K. Beckner
(MaceNews) – With inflation “way over” the Federal Reserve’s 2% target, it has “a long ways to go” to normalize monetary policy and needs to move faster than in the past to get the federal funds rate at least to neutral, if not higher.
Bullard, a voting member of the Fed’s policy-making Federal Open Market Committee, also urged moving quickly to reduce the central bank’s $9 trillion balance sheet. If inflation doesn’t moderate, that may ultimately entail outright sales of securities held, he said.
The Fed doesn’t need to worry much about hurting the economy or the labor market, despite downside risks from Russia’s invasion of Ukraine, he suggested in a virtual event hosted by the Mid-Size Bank Coalition of America.
The war in Ukraine could trigger recession in Europe, but a less energy dependent U.S. economy should continue to grow above potential and make further progress reducing unemployment, in his view.
Bullard dissented a week ago when the FOMC raised the federal funds rate 25 basis points after it had been held near zero for two years, because he wanted an immediate 50 basis point hike.
The FOMC said it “anticipates that ongoing increases in the target range will be appropriate.” Participants projected the funds rate will rise to 1.9% by the end of 2022 and to 2.8% by the end of 2023 – above the FOMC’s downwardly revised 2.4% “longer run” or “neutral rate.”
The FOMC also said it expects to start reducing the Fed’s balance sheet “at a coming meeting,” which Chairman Jerome Powell could be as soon as the May 3-4 meeting.
Explaining his dissent last Friday, Bullard argued the FOMC could afford to act more boldly to bring inflation under control.
The economy has been “especially resilient in the face of the pandemic” and is likely keep growing “at a pace comfortably above its long-run potential growth rate” despite geopolitical risks and that labor markets are “stronger than they have been in a generation,” Bullard wrote, adding, “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.”
“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,” he continued. “The Committee will have to move quickly to address this situation or risk losing credibility on its inflation target.”
Bullard contended the FOMC needs to “try to achieve a level of the policy rate above 3% this year. This would quickly adjust the policy rate to a more appropriate level for the current circumstances.”
Asked Wednesday to elaborate on his economic and policy views in light of the ongoing Ukraine war, Bullard said that “major geopolitical rift” and related sanctions could hurt trade and “pull Europe into recession.”
But he said the direct effects of the Ukraine crisis on the U.S. economy “probably are not that large” despite the spike in oil prices.
“We’ve seen these prices before,” he observed, but the U.S. has become “less energy dependent… In addition the U.S. is a major oil producer…so the energy effects are nowhere near as clear as they once would have been…Some parts (of the economy) are hurt, but other parts are helped.”
So “the U.S. economy will continue to grow above potential in 2022 and 2023,” Bullard predicted, and “that suggests U.S. labor markets, which are already hot, will continue to improve further.” He predicted the unemployment rate will fall to 3.1% – lower than the FOMC’s median forecast.
Meanwhile, inflation has ballooned faster than the Fed anticipated. “This isn’t just little bit of inflation; it’s a lot of inflation….,” he said. “We’re way over our inflation target of 2%,” even
excluding food and energy.
This “surprise to the upside” on inflation is “what’s really changed things dramatically the last few months and necessitated all of us to think about how fast things are going to have to move to keep inflation controlled” Bullard said.
With the FOMC having only raised the funds rate 25 basis points to a target range of 25 to 50 basis points, there is “a long ways to go,” he said.
Bullard said the FOMC needs to move the funds rate to a “neutral level” of “2 to 2 ½%” as soon as possible and probably “go above (neutral) to put downward pressure on inflation.”
His expectation is that the Fed is “going to move faster than what we’re used to.’
Simultaneously, Bullard repeated his call for early shrinkage of the Fed’s balance sheet, saying the Fed has already waited too long to start doing so.
“We overstayed our welcome on asset purchases…,” he said. “If we had to do it over again (the FOMC would) stop purchases soone.”
At this juncture, “we have a lot of inflation…,” he said. “It would behoove the Committee to just go ahead and at least allow passive run-off … reduce the balance sheet and take some of that back.”
“We’ve got a long ways to go in this dimension,” Bullard went on, adding that the FOMC should start by ordering a “passive runoff” of maturing securities to “get back to the pre-pandemic size” of the balance sheet – about half what it is now.
Bullard, an early advocate of quantitative easing in 2008, soon after he took office, said he would “initially be happy to go with a run-off strategy” on a faster schedule that in 2017-19, but added. “later, if inflation is not moderating then we could look at asset sales and get further reduction in the balance sheet…”
Although he has been the most outspokenly hawkish FOMC voter, Bullard has company in wanting to move rapidly to tighten monetary policy.
His fellow voter Cleveland Fed President Loretta Mester said Tuesday the FOMC should raise the funds rate to 2.5% this year and said that would likely entail at least one 50 basis point move at the FOMC’s six remaining scheduled 2022 meetings.
Mester said she would be prepared to “adjust” monetary policy, depending on how the economy evolves in a climate of heightened uncertainty caused by Russia’s invasion of Ukraine, but said for now upside inflation risks outweigh downside economic risks from the Ukraine war.
Powell also seems to favor bold action to reduce inflation, but not under any and all circumstances. Monday, he told the National Association for Business Economics the FOMC would “move more aggressively” if “appropriate,” but qualified that assertion by saying the Committee wants to restore price stability without hurting employment and by saying the Ukraine crisis requires flexibility.
“As the outlook evolves, we will adjust policy as needed in order to ensure a return to price stability with a strong job market …,” Powell said.