© . James Bullard, president of the Federal Reserve Bank of St. Louis, leaves three-day “Challenges for Monetary Policy” conference in Jackson Hole, Wyoming, US, Aug. 23, 2019. REUTERS/Jonathan Crosby By Howard Schneider () – The Fed Walks behind in its fight against inflation and must raise federal fund rates by another 3 percentage points by the end of the year, James Bullard, president of the St. Louis Fed, said Thursday, a pace that represents a half-point increase in each of this year’s six remaining meetings. “I’d like to get there in the second half of this year… We have to move,” Bullard said, trying to stay ahead of inflation three times the Fed’s 2% target. “We’re talking bigger steps than we’ve made in a long time.” The pace described is slightly faster than the pace Bullard offered at the March Fed meeting, where Federal Funds interest rates reached 3.25% by the end of the year. The minutes of that session showed that “many” of Bullard’s colleagues were preparing for “one or more” half-point raises at upcoming meetings. But the path outlined by Bullard, now arguably the most aggressive policymaker in its response to inflation, goes even further than what markets currently expect from the central bank. Trading in federal funds futures contracts shows that investors expect the Fed to raise its key rate to a range of 2.5% to 2.75% by the end of the year, according to data collected by the CME Group (NASDAQ:) . Even a “generous” application of standard monetary policy rules, Bullard said, showed the Fed “behind the curve” in fighting inflation, even after taking into account the financial “tightening” that has already taken place in markets on based on investor expectations. will act more aggressively. While the Fed has only raised its key rate by a quarter of a percentage point to a range of 0.25% to 0.5%, the 2-year Treasury yield rose from about 1.45% on March 1 to 2.45% on Thursday morning. . and the interest rate on a 30-year mortgage is approaching 5% from recent lows of less than 3%. The next time the Fed meets on May 3-4, and a half-point rise during that session is widely expected. Inflation data released next week is expected to show consumer prices rising at a breakneck pace in March, perhaps north of 8% or higher, amid a spike in gasoline prices due to the outbreak of the war. in Ukraine. But some Fed officials have pointed to the second half of 2022 as a time to assess how the Fed’s relatively rapid monetary policy shift is affecting the economy. In addition to raising its target rate, the Fed is likely to begin reducing its holdings of government bonds and mortgage-backed securities by up to $95 billion a month in May, a move that could further raise key long-term interest rates. Some policymakers have suggested that the additional tightening resulting from the Fed’s balance sheet decisions could cause a slower or lesser increase in Federal Funds interest rates. However, balance sheet changes “have already been absorbed by the markets,” Bullard said, and should not affect the Fed’s rate decisions. Likewise, he said that “as it stands” the war in Ukraine should not affect the Fed’s fight against inflation.
