According to Bloomberg News reports, the President of the Federal Reserve Bank of St Louis, James Bullard, has stated that he favors hiking interest rates steeply so that the inflation, which is the highest in 40 years, can be countered well. He suggested that he prefer a half-point rise in May and a shrinking of the bloated balance sheet of the Federal Reserve.
Impact of interest hike
The Federal Reserve hiked its benchmark overnight rate last month by 25 basis points to a target range between 0.25% and 0.50%. Bullard, who was the only dissenter, favored a half-point increase in the 8-1 policy vote.
From the minutes of the March policy meeting, which were made available on Wednesday, it was found that several officials thought in the same manner as Bullard and were in favor of only a half-point hike for being cautious while the ongoing Russian invasion does not seem to resolve. The meeting minutes also indicated that many of them believe that a half-point hike might as well address inflation, which is at an all-time high now.
Bloomberg News reports that the minutes were seen to outline a plan made by the Federal Reserve to shrink its approximately $9 trillion balance sheet by $1 trillion per year, which would contribute to the stricter financial conditions. Some Fed officials have equated the procedure to a single or more increase in rates. Bullard also said that the securities runoff has been well understood by the markets and is not a reason for the Federal Reserve not to hike by 50 basis points in May.
While commenting, Bullard stated that the benchmarks related to the monetary policies using “generous assumptions” only indicate that the US central bank might need to increase the interest rate to approximately 3.5% so that inflation can be tackled better.
Bullard also said that the markets have already included the Fed tightening prices with the 2-year Treasury yield that was trading at about 2.45% or 1% point below what might be required.
Bloomberg News reports that Bullard also anticipates that there might be a slower growth but a robust one at about 2.8% in 2022, even though the first quarter has been a week and there has been the ongoing Russia and Ukraine war. He also said that the unemployment rate might drop below 3% in the current year.
Talking about the yield curve, however, the St Louis Fed chief went on to say that the recent inversion of parts that have taken place could well be a warning sign for growth.
