Louis Federal Reserve President James Bullard does not believe the US central bank is attacking high inflation with sufficient urgency, risking both its credibility and the US economic recovery.
The president of the St. Louis Federal Reserve was the only one to vote no when the central bank raised its key US interest rate on Wednesday for the first time in four years.
His displeasure? The Fed should have gone even further. He wanted a half-point increase to bring interest rates above 3% by the end of the year.
Instead, the bank raised its base short-term interest rate by just a quarter of a percentage point, from zero to a range of 0.25% to 0.5%. The Fed also said that rates are likely to be around 1.9% by the end of the year.
” [Fed] you will have to act quickly to correct this situation or you risk losing confidence in your inflation target,” Bullard said in a statement Friday morning.
Bullard has been warning for months that inflation is rising dangerously fast and that the Fed needs to take action.
“Now we are at greater risk than ever before that things could get out of control,” he said last month, even implying that there is too much groupthink at the Fed.
The Fed has to some extent signaled a more aggressive stance this week.
The bank is forecasting a steady streak of rate hikes over the next two years, with interest rates topping Wall Street’s forecasts at 2.8%.
This increase is expected to dampen consumer spending and business investment, slow down the booming economy and help reduce inflation.
That still wasn’t enough for Bullard. He said he was worried the Fed would not be able to bring inflation down to pre-pandemic levels of 2% or less without faster action.
“The unexpectedly high inflation means that the committee’s discount rate is currently too low to prudently manage the macroeconomic situation in the US,” he said.
“The burden of excessive inflation is especially hard on those with modest incomes and wealth, and those with limited ability to adjust to the rising cost of living.”
By moving too slowly, the Fed could also endanger the economy, he said. He pointed to the Fed’s aggressive rate hike in the mid-1990s, which nipped inflation in the bud while keeping the economy growing.
“I think the committee should try to achieve a similar outcome in the current environment,” Bullard said.
Not only does he want faster interest rate hikes, but he advocates “executing the plan” to cut the Fed’s balance sheet by $9 trillion. The Fed on Wednesday said it would lay out the details of the asset sale “at its next meeting.”
The Fed bought trillions of Treasuries and mortgage-backed securities during the pandemic to cut long-term rates to historic lows to support economic growth.