The Federal Reserve should raise interest rates above 3 percent by the end of 2022, St. Louis Fed Bank President James Bullard says.
Bullard, who was the lone dissenting vote during last week's much-anticipated Federal Open Market Committee (FOMC) policy meeting, argued that the central bank isn't doing enough to fight inflation, which is at a 40-year high. That, he notes, could risk the institution's credibility and threaten the post-pandemic economic recovery.
Fed officials voted to lift the benchmark short-term rate by a quarter of a percentage point, increasing it to a range of 0.25 percent to 0.5 percent. The Fed projects that rates will end the year at around 1.9 percent.
According to Bullard, the committee’s policy rate is "far too low" given the current macroeconomic circumstances.
Bullard said he wanted a 50-basis-point hike, adding that the FOMC should have implemented a plan to reduce the size of the more than $9 trillion balance sheet. The proposed combination would have been "a more appropriate level for the current circumstances," he said.
"The burden of excessive inflation is particularly heavy for people with modest incomes and wealth and for those with limited ability to adjust to a rising cost of living," he stated.
For months, Bullard has been vocal about inflation dangers in the U.S. economy, urging greater action to rein in 40-year-high prices. Last month, he recommended the benchmark rate should be increased to 1 percent by July, possibly front-loading monetary tightening.
While Waller voted for the quarter-point move on March 16 amid uncertainty surrounding the Ukraine–Russia military conflict, he suggested that the Fed needs to be more aggressive soon. Waller also thinks the Fed needs to trim its asset purchases soon.
"I really favor front-loading our rate hikes, that we need to do more withdrawal of accommodation now if we want to have an impact on inflation later this year and next year," he said. "So in that sense, the way to front-load it is to pull some rate hikes forward, which would imply 50 basis points at one or multiple meetings in the near future."
Waller said the Fed could draw down a vast amount of liquidity from the financial system "without really doing much damage."
Fed Chair Jerome Powell told reporters that the monetary body will employ the necessary measures to avoid an inflationary crisis, but he conceded that it could take a few years.
"We will take the necessary steps to ensure that high inflation does not become entrenched," Powell said. “We’re fully committed to bring inflation back down. High inflation takes a toll on everybody."
The Fed anticipates price inflation will slow to 2.7 percent in 2023 and 2.3 percent in 2024.
“We expect inflation to remain high through the middle of the year, begin to come down, then begin to come down more sharply next year," Powell said.
At the same time, Russia's invasion of Ukraine and its broader effects on the global supply chain could affect these forecasts. Powell even addressed the situation in Eastern Europe, noting that he would have expected inflation to peak in the first quarter if it weren't for the Kremlin’s incursion into its western neighbor.
Many market analysts are on the side of Bullard, asserting that the rate was too low.
"Inflation is becoming entrenched in the U.S. economy. The Fed’s concern for transitory inflation has escalated to a full-blown panic," Jason Brady, president and CEO of Thornburg Investment Management, told The Epoch Times.
"Fed is going to be forced to choose between a hard landing and entrenched inflation. The forecast and statement unsurprisingly fails to recognize these binary outcomes."
The Federal Reserve's main "policy mistake has already occurred," says Nancy Tengler, CEO and chief investment officer at Laffer Tengler Investments.
"Letting inflation running too hot for too long was a mistake and now the Fed finds themselves behind the curve," she wrote in a research note. "Three, four, or five (unlikely) increases in 2022 will have little impact on fighting inflation so we hope, as the old saying goes, that the cure for high prices will be high prices."
If sky-high inflation persists and diminishing monetary support risks undermining the post-crisis recovery, could the U.S. slip into a recession?
“If the economy indeed falls into recession, we expect it to be shallow and short,” Tengler said.
Recession talk has been prevalent in recent weeks, with many financial institutions and market analysts increasing the odds of an economic downturn within the next 12 to 18 months.
"Our economists estimate there’s a 20% to 35% chance of a U.S. downturn, which is roughly in line with models based on U.S. Treasury yields," Goldman Sachs noted in a recent briefing.