James Bullard, who heads the regional Federal Reserve branch in St. Louis, Missouri, said in a Friday statement that unless the central bank increases interest rates quickly, there is a risk that inflation “could get out of control.”
“I dissented with the Federal Open Market Committee (FOMC) decision announced on March 16, 2022, to raise the target range for the federal funds rate by 25 basis points to 0.25% to 0.50%. In my view, raising the target range to 0.50% to 0.75% and implementing a plan for reducing the size of the Fed’s balance sheet would have been more appropriate actions,” Bullard said. He was the lone dissenting vote.
Bullard said the Fed “will have to move quickly to address this situation or risk losing credibility on its inflation target,” speculating that the federal funds rate at which banks can lend reserve balances to other banks on an overnight basis should hit 3% by the end of the year; in its Wednesday decision, the Fed’s Open Market Committee set the rate at just 0.33% and said it expects to hit 1.9% by the end of 2022.
Bullard wasn’t alone, though: Federal Reserve Governor Christopher Waller, who sits on the central bank’s Board of Governors, also spoke out on Friday. Waller told CNBC that the Fed could safely tackle “raging” inflation without doing too much damage to the economy, including with interest rate hikes and by selling off some of its bond holdings.
“I really favor front-loading our rate hikes, that we need to do more withdrawal of accommodation now if we want to have an impact on inflation later this year and next year,” Waller told CNBC’s Squawk Box. “So in that sense, the way to front-load it is to pull some rate hikes forward, which would imply 50 basis points at one or multiple meetings in the near future.”
The rate hike has also been criticized for being too drastic, too: speaking to reporters on Thursday, International Monetary Fund (IMF) spokesperson Gerry Rice warned that "This faster pace of Fed normalization increases the risks faced by other countries relying on dollar funding, especially in emerging and developing economies.”
In the 1980s, efforts by then-Fed Chairman Paul Volcker to rein in inflation with steep interest rate hikes had a disastrous effect on Third World nations, dramatically increasing their debt burdens and crashing their economies. On Thursday, an article in London’s Financial Times described the Fed’s present chairman, Jerome Powell, as “channeling his inner Volcker,” noting that the Fed chaid told Congress earlier this month that Volcker was “the greatest economic public servant of the era” and a model for addressing the present crisis.
Wednesday’s interest rate increase was the first in three years as the Fed ended its long toleration of rising inflation. Rates have been low for more than a decade in order to help the economy rebuild after the 2008 financial crash and then the 2020 collapse caused by lockdowns at the beginning of the COVID-19 pandemic, but rising shipping costs also caused by the pandemic have push prices upward, fueling depreciation of the dollar.
Earlier this year, the Bureau of Labor Statistics reported the worst increase in commodity prices in 40 years, and in its March report, the BLS said that the average price of consumer goods had increased by 7.9% over the previous 12 months. US President Joe Biden’s decision earlier this month to boycott Russian petroleum exports in retaliation for Moscow’s “neutralization” operation in Ukraine only amplified existing trends.
While stocks had fallen in response to the sharp spike in petroleum prices and other US sanctions targeting Russia’s financial sector, they were also driven downward in the leadup to the Fed’s rate hike by uncertainties about its severity. In the wake of the hike, stocks rose, and the S&P 500, an index of the performance of 500 large corporations, was set up on Friday to finish its best week since late 2020.