Fed’s Bullard opens possibility of bigger December hike

(Bloomberg) — Federal Reserve Bank of St. Louis President James Bullard left open the possibility that the central bank would raise interest rates by 75 basis points at each of its next two meetings in November and December, while saying it was too early to make that call.

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The Fed raised interest rates by 75 basis points for the third consecutive meeting last month, to a target range of 3% to 3.25%. Officials forecast 125 basis points of tightening for the rest of the year, suggesting a move of 75 basis points in November and 50 basis points in December. Another 25 basis points of tightening were set for 2023, according to their median estimate.

“Whether the committee wants to pull any proposed or contemplated rate hikes from 2023 into the December meeting, I think that̵[ads1]7;s a premature judgment to make,” he said Saturday in Washington during an event on the sidelines of the annual meeting of the International Monetary Fund and the World Bank.

The US central bank is raising interest rates at the fastest pace since the 1980s to curb inflation at 40-year highs. Investors now see a solid chance that the Fed will raise interest rates by 75 basis points in both November and December, after data on Thursday showed that core consumer prices rose more than expected in September.

Estimates released Sept. 21 by the Fed showed officials expect interest rates to rise to 4.4% this year and 4.6% next, according to their median estimate.

Bullard said it probably didn’t make much difference from a macroeconomic perspective whether the further tightening occurred later this year or in the first quarter of 2023. But he reminded the audience that he has been a fan of “front-loading” rate hikes by moving quickly policy to a level that limits inflation, and then officials can pause and take stock.

“You want to get to where you need to be and then you can react to data,” he said, adding that it was a “bullish case” for next year if falls in inflation forecasts from both the central bank and private sector economists are turned out to be correct.

“If that momentum comes in, it will look very good and we will basically be able to stay where we are and see inflation come down,” he said. “But there is also a big risk of inflation going even higher, and then we have to react to that.”

Bullard also supported continuing to shrink the central bank’s balance sheet at its current pace for some time.

“It’s far too early to say that we will change this policy anytime soon,” Bullard said during a panel discussion, in response to a question about whether the Fed would change the balance sheet drain, currently at a pace at a maximum. 95 billion dollars a month.

Bullard votes on monetary policy this year and has been one of the more hawkish officials on its 19-member policy committee.

He said he is pleased that the Fed’s 75 basis point rate hikes had not caused any significant market turmoil. “We’ve been able to get this far with relatively low financial stress,” Bullard said.

In response to questions, he said moves in the dollar in response to Fed rate hikes were “not surprising.” The dollar has risen 16.4% over the 12 months, according to the Bloomberg Dollar Spot Index.

“It won’t always be like this,” Bullard said. “If the Fed can get to a place where the committee thinks we’re putting meaningful downward pressure on inflation at the level of policy rates we have,” and other central banks change their policies and perhaps become more aggressive, “you could see other moves in the dollar.”

(Updates with Bullard comments from the third paragraph.)

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