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The Federal Reserve’s turn to fight inflation received sharp relief on Friday, with the hawkish wing of the central bank calling for an accelerated pace of policy tightening and a former dove saying there could be grounds for aggressive action.
In the first wave of official comments following Wednesday’s quarter-point rate hike, St. Louis Fed President James Bullard said he favored raising rates above 3% by year-end, while Minneapolis’ Neil Kashkari, who advocated patience with the rate hike from scratch – said that he was wrong about inflation, and now supported the action.
Federal Open Market Committee officials voted 8-1 this week to raise their key rate target range to 0.25%-0.5% and project a string of hikes that will push it to 1.75%-2% by the end of the year. . Known as the dot plot, the projections also showed that almost half of the 16 current politicians wanted to move faster.
Chairman Jerome Powell has the task of forging consensus on the policy setting committee and has the most influence on the final course of US monetary policy. Now that the doves are joining the hawks in advocating action to curb the highest inflation in 40 years, it will be easier for him to steer policy in a more aggressive direction if necessary.
Bullard, who this week opposed a half-point hike and the implementation of a balance sheet cut plan, named himself as the high point official for 2022 and said the central bank’s reputation would be in jeopardy if it didn’t act with sufficient urgency.
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“The combination of strong real economic performance and unexpectedly high inflation means the committee’s discount rate is currently too low to prudently manage the US macroeconomic environment,” Bullard said in a statement explaining his disagreement. “The committee will have to act quickly to resolve this situation or risk losing confidence in its inflation target.”
Speaking some time later, Gov. Christopher Waller said the war in Ukraine was the reason he didn’t push for a half-point raise in this week’s meeting, but it was definitely discussed in upcoming meetings.
“The data is basically telling us to go to 50, but geopolitical events are forcing you to move ahead with caution. So those two factors combined made me support a 25 basis point increase, he said in a CNBC TV interview. “In the future, the question will arise whether it is worth thinking about scoring 50 points in the next couple of meetings or not. But the data definitely indicates that we are moving in that direction.”
The consumer price index rose 7.9% in February, the highest since 1982; The Fed’s 2% inflation target is based on a separate measure, the Personal Consumption Expenditure Price Index, which rose 6.1% in the 12 months to January.
Kashkari, in an essay posted on his bank’s website, said he favors raising interest rates to a range of 1.75% to 2% by the end of 2022, in line with the Fed officials’ median forecast. He also said that if the US economy now appears to be in “an equilibrium with high pressures and high inflation, then the FOMC will need to act more aggressively and bring policy into a restrictive stance.”
At stake is whether the Fed can achieve a rare soft landing for the world’s largest economy. If dragged on too slowly, there is a risk that inflation will spiral out of control, necessitating even tougher action. Changing too quickly could cause the central bank to stir up the markets and send the economy into recession.
Complicating matters: Russia’s invasion of Ukraine has pushed fuel, food and metal prices even higher, fueling fears of 1970s-style stagflation, threatening prices, growth and financial market stability.
Another politician, Richmond’s Thomas Barkin, said on Friday that he is “very open to a half-point move” if price pressures do not ease or inflation expectations rise significantly, while arguing that the Fed needs to strike a balance.
“We are normalizing rates to keep inflation in check, but if we over-adjust, we could negatively impact employment,” he said. “We have time to take a neutral position. Inflation and employment continue to be heavily influenced by supply and participation pressures in the era of the pandemic and more recently the war with Ukraine.”
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