The best policy path for the Federal Reserve would be to “tack in a more hawkish direction” to manage the risks of higher inflation, said St. Louis Fed President James Bullard on Tuesday.
In an interview on Bloomberg, Bullard said the Fed could “speed up the taper” to $30 billion per month so that asset purchases would be finished at the end of the first quarter. At the moment, the Fed is tapering its asset purchases at a $15 billion-per-month pace, aiming to end the purchases in June.
Another hawkish policy shift to consider might be for the Fed to “play up” the possibility of raising interest rates even while it is tapering its bond purchases. The Fed has signaled so far that it doesn’t want to raise rates until it had finished the tapering.
Another hawkish policy idea would be to allow the Fed’s balance sheet to shrink at the end of the taper instead of waiting on that decision.
Moving in a hawkish direction now “could pay great dividends” in the next 18 months because it would mean the Fed wouldn’t have to tighten so aggressively in the future.
“It makes sense to try to move a little bit more hawkishly here and try to manage the inflation risk,” he said.
The core rate of the consumer price index rose to 3.6% in October – the fastest pace in 30 years.
The St. Louis Fed president said that core consumer prices don’t have a track record of moving down at a rapid pace.
Bullard, who will be a voting member of the Fed’s interest-rate committee in 2022, said he has two quarter-point rate hikes penciled in for the year.