Last-Resort Fed Hike Enters Debate as Bullard Invokes 1994 Move

The Federal Reserve’s most hawkish official cracked open the door to discussing the first 75 basis-point interest-rate hike since 1994, a move economists say would be a last resort in case inflation further spirals out of control.

St. Louis Fed President James Bullard on Monday gave high praise for former Fed Chairman Alan Greenspan’s decision to raise rates by three quarters of a percentage point that year, saying it “set up the U.S. economy for a stellar second half of the 1990s, one of the best periods in U.S. macroeconomic history.”

“I wouldn’t rule it out, but it is not my base case here,” he said in a virtual presentation to the Council on Foreign Relations.

Bullard, 61, an economist who’s worked at the St. Louis Fed since 1990 and became its president in 2008, has been the strongest voice for tighter policy among Federal Open Market Committee participants over the past year. He’s also become an influential voice whose more recent recommendations have ended up being followed by other committee members, though his impact throughout his tenure has been mixed.

In recent months, he has urged the FOMC to halt its purchases of Treasuries and mortgage-backed securities early, which the panel did in March, and has pushed for a half-point hike starting in early February, which Fed Chair Jerome Powell and other policy makers have now said is on the table if needed for their May 3-4 meeting.

“Seventy-five basis points has to be on the table if inflation accelerates sharply,” said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC. “Is it likely? No. I think inflation would have to be accelerating, giving a sense of getting of out of control, to spark a move of that magnitude.”