‘Fed credibility is on the line in inflation fight’

Washington: The Federal Reserve needs to accelerate the pace of interest rate increases to fight rising inflation, but can do so in a way that doesn´t roil financial markets, St. Louis Fed President James Bullard said on Monday.

"Our credibility is on the line here," Bullard said on CNBC. After consumer prices saw their biggest jump in 40 years in January, he said the Fed should "front load" its actions and raise the benchmark borrowing rate to one percent by July.

Bullard reiterated calls for a faster pace of Fed interest rate hikes, saying that four strong inflation reports in a row warranted action and that the central bank needed to "ratify" market expectations of its upcoming moves.

Bullard, who himself helped shape those expectations with calls last week for a 50 basis point increase at the Fed's March meeting. Bullard, a voting member of the Fed´s policy-setting committee, caused a sharp reaction by markets last week with similar comments on the need to remove stimulus from the economy provided during the Covid-19 pandemic.

The consumer price index in January jumped 7.5 percent compared to a year earlier, its largest increase since 1982. Bullard said the data capped four months of worrisome reports indicating that "inflation is broadening and possibly accelerating in the US economy."

"It was really October, November, December, January that called into question any idea that this inflation was naturally going to moderate in any reasonable time frame without the Fed taking action," said Bullard.

He feels the Fed's response should involve a full percentage point of rate increases over the Fed's three meetings between now and July 1, slightly faster than he had suggested before. That implies at least one hike of a half percentage point at one of those meetings instead of the quarter point increases that the Fed has used in recent years.

His comments, coupled with a stronger than expected January inflation report, pushed up yields on the 2-year Treasury, often considered a proxy for the direction of Fed policy. It also helped prompt traders in contracts tied to the Fed's target interest rate that a half-point increase in March was coming.

Other Fed bank presidents have pushed back - modestly - on that idea, cautioning that no decisions had been made. None of the Fed's governors, and most notably Fed chair Jerome Powell, have spoken publicly to the matter since the central bank's last meeting in January.

Bullard said he would defer to Powell on the sequencing of coming rate increases. But he also said the Fed at this point needed to "follow through" with what markets anticipate, and in effect lock in the tighter financial conditions seen in rising interest rates for 2 year Treasury bonds.

Powell is "very good at managing the committee," Bullard said. But "the Fed has to follow through and ratify those expectations that have been built into the 2 year, and if we don't then it makes it appear that we are not defending" the 2% inflation target.

"I think my position is a good one and I will try to convince my colleagues, said Bullard.

Bullard said he would try to convince his central bank colleagues of the need to move quickly, but defer to Fed Chair Jerome Powell.

"I do think we need to front load more of our planned removal of accommodation than we would have previously," he said. "However, I think we can do it in a way that´s organized and not disruptive to markets."

The Fed´s next policy meeting is set for March 15-16, and some economists say the central bank could even make an aggressive, half-point increase to signal its determination to contain rising prices.