Bullard Says Raising Interest Rates Now Can Save Fed’s Credibility

With their credibility on the line, St. Louis Fed President James Bullard wants the agency to raise interest rates now. He said that the Federal Reserve needs to react to accelerating inflation.

RELATED: Federal Reserve Signals Interest Rate Hike This March

Raising Interest Rates Now Can Restore Federal Reserve’s Credibility 

During a CNBC Squawk Box interview, Bullard admitted getting surprised by the US’s current inflation rate. “I do think we need to front-load more of our planned removal of accommodation than we would have previously. We’ve been surprised at the upside on inflation. This is a lot of inflation,” he said. “Our credibility is on the line here and we do have to react to the data. However, I do think we can do it in a way that’s organized and not disruptive to markets.”

Last week, the St. Louis Fed President spooked the markets by issuing a controversial statement. He said that the Fed should raise the benchmark short-term borrowing rate by a full one percent by July. Bullard’s suggestion sent stocks on a roller coaster ride In fact, futures markets began factoring in up to seven quarter-percentage-point hikes within 2022. Additionally, markers adjusted their expectations for a 0.5 percentage point hike in interest rates this March. Many of Bullard’s colleagues believe that a quarter percentage point hike is a good start.  

Bullard Most Hawkish In Raising Interest Rates

With his statements, Bullard emerged as the most hawkish among the members of the Federal Open Market Committee. While all Fed officials agree to start raising interest rates in March, they all think that a quarter-point rise is enough. 

San Francisco Fed President Mary Daly prefers a more cautious approach. During an appearance at CBS’ Face the Nation, Daly warned against using excessive aggressive action. She said that history teaches us that aggressive Fed policy can have a destabilizing effect on growth and price stability. Instead, she favors gradual increases in interest hikes beginning March. Then, the Fed should continually watch, measure, and be careful about what we see ahead. She’ll agree with another round of interest rate hikes “when it seems the best place to do that.”

Bullard Thinks Inflation is Running Hot For Months Now

However, Bullard insists that inflation is still running hot after all these months. As such, the Fed needs to start aggressively using its tools to control price increases. Last January, the consumer price index reported a 1-year increase of 7.5%. This is the highest year-on-year increase in the past 40 years. 

Bullard said that officials should consider the last four quarterly reports rather than just the last one. He said that if you consider the last four reports in tandem, you’ll see that inflation is broadening and possibly accelerating. As a result, the net income of Americans declined due to strong inflation gains. 

Inflation Bad For Low and Moderate Income Households

Bullard added that current inflation rates are bad for low and moderate-income households. “People are unhappy, consumer confidence is declining. This is not a good situation. We have to reassure people that we’re going to defend our inflation target,” he said. “We’re going to get back to 2%.”

Later this week, the markets will have a better idea of what the Fed plans to do. The FOMC will release its minutes from its January meeting within the next few days. One point of interest in finding out how the central bank can reduce its $9 trillion in asset holdings. Despite the raging inflation, the Federal Reserve still plans to buy $20 billion more of Treasury bonds this month. Then, it will end its buying program in March.

Watch the CNBC Television video reporting that St. Louis Fed President James Bullard suggests Fed needs to ‘front-load' tightening

 Loading ...

What do you think of Bullard’s idea to frontload the increase in interest rates? Also, do you agree that the Fed needs to act sooner rather than later to tame inflation?

Let us know what you think. Share your thoughts below.