Fed Could Lift Off in March, Shrink Assets Next, Bullard Says

Federal Reserve policymakers could start to raise their target interest rate as soon as March and shrink the central bank’s balance sheet as a next step in response to surging inflation, Federal Reserve Bank of St. Louis President James Bullard said.

“The FOMC could begin increasing the policy rate as early as the March meeting in order to be in a better position to control inflation,” Bullard, referring to the Federal Open Market Committee, said to the CFA Society St. Louis on Thursday. “Subsequent rate increases during 2022 could be pulled forward or pushed back depending on inflation developments.”

Bullard, who has recently been among the most hawkish policymakers, endorsed the policy committee’s pivot to fighting increasing prices at last month’s meeting. Fed policymakers believed a stronger economy and higher inflation could warrant rate hikes “sooner or at a faster pace” than they previously expected, according to minutes of the Dec. 14-15 policy meeting released Wednesday.

In December, the FOMC announced it would wind down the Fed’s bond-buying program at a faster pace than first outlined at the previous meeting in early November, citing rising risks from inflation. The pace now ends purchases in March. The meeting also included discussion of reducing the balance sheet by not reinvesting maturing securities, though no decisions on timing were made.

Bullard favored three interest-rate hikes in 2022 in his December forecast submitted for the “dot plot” last meeting, he told reporters after his speech in a conference call. The St. Louis Fed leader said he places a priority on getting started early, giving the central bank flexibility for more or fewer hikes later.

“It makes sense to get going sooner rather than later, so I think March would be a definite possibility, based on data that we have today,” he said. “It would make sense to go ahead and lift off and then if inflation moderates as much as hoped by some forecasters then we would be able to slow down or not raise as fast as we otherwise would in the second half of the year.”