St. Louis Federal Reserve President Calls for a Quicker Hike in Interest Rates

St. Louis Federal Reserve Bank President James Bullard speaks at a public lecture in Singapore on Oct. 8, 2018. Edgar Su/Reuters

The president of the Federal Reserve Bank of St. Louis, James Bullard, on March 22 reiterated last week’s call for a more aggressive stance to combat the highest level of inflation in 40 years.

Bullard said that U.S. monetary policy needs to be tightened sooner rather than later, by raising interest rates to above 3 percent by the end of the year.

“The Fed needs to move aggressively to keep inflation under control,” said Bullard in an interview with Bloomberg.

“We need to get to neutral at least so we’re not putting upward pressure on inflation during this period when we have much higher inflation than we’re used to in the U.S.”

Bullard said that he estimates the neutral rate, which is the balanced rate that neither accelerates or suppresses inflation, at 2 percent.

The Fed’s latest quarterly projections from March 16 show rates rising to 1.9 percent by the end of 2021 and 2.8 percent by the end of 2023.

The central bank president, who is one of the interest rate hawks on the Federal Open Market Committee (FOMC), does not believe that current Fed policy is aggressive enough.

Bullard was the only policymaker on the FOMC to vote for a 50 basis point hike last week, while the rest of the committee voted 8 to 1 for a 25 basis point rate increase for the first time since 2018.

“I would probably get to a restrictive policy so we are putting some downward pressure,” said Bullard.

“History tells us that the faster we moved to that situation, the better chance we will have of moving inflation back to target and getting a boom in the U.S. economy,” he continued.

The Federal Reserve Bank’s next policy meeting will be held from May 3 to 4, to discuss future interest rate hikes.

Chairman Jerome Powell announced on March 21 that the central bank may consider preparing to raise rates by a half-point after the Fed policy meeting in May, depending on the situation.

“We will take the necessary steps to ensure a return to price stability,” said Powell.

“In particular, if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so.”

While approving the chairman’s recent statements, Bullard believes that “faster is better,” adding that “the 1994 tightening cycle or removal of accommodation cycle is probably the best analogy here,” in reference to the Fed under Alan Greenspan between 1994 and 1995 raising rates from 3 to 6 percent.

The move by the Fed in the 1990s contained inflation and pushed up strong growth, leading to a decade-long expansion of the economy that was one of the longest in U.S. history at that point.

Bullard said it was too early to tell whether the FOMC would go along with a half-point hike in May, but he does not think that it would disrupt markets.

“We came out of the pandemic and we got surprised by inflation,” said Bullard, “but now what you have to do is move the policy rate up discreetly a fair amount not to be too disruptive, but I think 50 basis points should definitely be in the mix.”