Fed’s Bullard Calls for Higher Rates as Balance Sheet Jumps $100 Billion, Depositors Pull Funds From Banks

President and CEO of the Federal Reserve Bank of St. Louis James Bullard in Washington on Aug. 6, 2019. Alastair Pike/AFP via Getty Images

The Federal Reserve must keep raising interest rates in its inflation fight as the U.S. banking turmoil subsides, says St. Louis Fed Bank President James Bullard.

Speaking to the Greater St. Louis Inc. community organization on March 24, Bullard said the central bank must lift the benchmark federal funds rate (FFR) higher than previously anticipated, citing prospects for stickier and stubborn inflation and stronger-than-expected economic growth.

Bullard estimated that the institution should increase the policy rate to 5.625 percent, adding that the sooner policymakers bring the FFR to this level, the better it will be for the United States.

On March 22, the Federal Open Market Committee (FOMC) pulled the trigger on a quarter-point rate hike, lifting the FFR to a target range of 4.75 percent and 5 percent. The Fed is penciling in one more rate increase this year, although Fed Chair Jerome Powell told reporters at the post-FOMC news conference that the central bank would be ready to raise rates if conditions called for additional tightening.

Despite the turmoil in the banking sector producing uncertainty, Bullard thinks the national economy will be able to withstand the financial stress because long-term Treasury yields have diminished.

“Continued appropriate macroprudential policy can contain financial stress, while appropriate monetary policy can continue to put downward pressure on inflation,” Bullard said, adding that it’s common that not all financial companies “adjust their businesses appropriately to the changing environment.”

Recent economic data suggest that the U.S. economy is improving but that inflation “remains too high,” he stated.

S&P Global published its three purchasing managers’ index (PMI) readings on March 24, showing a rebound in the economic landscape and elevated inflation. The Composite PMI surged to 53.3, the Services PMI advanced to 53.8, and the Manufacturing PMI swelled to 49.3.

“The PMI is broadly consistent with annualized GDP growth approaching 2%, painting a far more positive picture of economic resilience than the declines seen throughout the second half of last year and at the start of 2023,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said in the report.

“There is also some concern regarding inflation, with the survey’s gauge of selling prices increasing at a faster rate in March despite lower costs feeding through the manufacturing sector. The inflationary upturn is now being led by stronger service sector price increases, linked largely to faster wage growth.”

Fed Balance Sheet Grows

The U.S. central bank’s total assets continue to grow, reversing nearly a year-long trend of the Fed trimming its balance sheet.

For the week ending March 23, the Fed’s balance sheet climbed by about 1 percent, or nearly $100 billion, to $8.733 trillion, according to new Fed data.

Loans accounted for most of the balance sheet expansion as the Fed’s Bank Term Funding Program and “other credit extensions” ballooned by $35 billion and $179 billion, respectively.

The central bank’s Treasury securities holdings were relatively unchanged.

This comes after nearly $300 billion was added to the balance sheet in the previous week.

When asked by reporters if the Fed was engaging in quantitative easing, Powell confirmed that the rate-setting committee wasn’t altering the stance of monetary policy.

Federal Reserve Chair Jerome Powell removes his glasses as he testifies before the House Committee on Financial Services on Capitol Hill in Washington on March 8, 2023. Anna Moneymaker/Getty Images

“That balance-sheet expansion is really temporary lending to banks to meet those special liquidity demands created by the recent tensions,” he said, adding that this mechanism has been successful in stabilizing banking conditions.

“We do believe that it’s working. It’s having its intended effect of bolstering confidence in the banking system and thereby for stalling what might otherwise have been an abrupt and outsized tightening in financial conditions.”

Powell attempted to calm financial markets by assuring Americans that their deposits were safe.

“You’ve seen that we have the tools to protect depositors when there’s a threat of serious harm to the economy or to the financial system, and we’re prepared to use those tools,” Powell said. “And I think depositors should assume that their deposits are safe.”

However, he asserted that while the troubles are impacting a small number of banks, if this is left unaddressed, then it “can undermine confidence in healthy banks and threaten the ability of the banking system as a whole to play its vital role in supporting the savings and credit needs of households and businesses.”

U.S. Secretary of the Treasury Janet Yellen convened a closed emergency meeting of the Financial Stability Oversight Council on March 24 that assessed market developments. A statement confirmed that the council discussed current banking conditions and concluded that “the U.S. banking system remains sound and resilient.”

Despite the broad assurances from the White House and the Fed, new central bank data show that bank customers collectively removed more than $98 billion from bank accounts for the week ending March 15. The smaller banks witnessed outflows of $120 billion, and larger entities saw deposit inflows of $67 billion.