The Fed is expected to raise rates by one percentage point by the middle of the year – Waller

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The headquarters of the Federal Reserve in Washington on September 16, 2015. REUTERS / Kevin Lamarque

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Feb 24 (Reuters) – Federal Reserve Governor Christopher Waller on Thursday made the case for a “concerted” effort to contain inflation, calling for raising interest rates by one percentage point complete by the middle of the year, starting with half a percentage point. rise in March if data for the coming weeks continues to point to an “extremely hot” economy.

“I think appropriate interest rate policy takes the target range to 1 to 1.25% early in the summer,” Waller said at the University of California, Santa Barbara, Economic Forecast Project. The Fed should also start reducing its balance sheet by $9 trillion “no later than” at its July meeting, he said.

Once the first rate hikes are made, further increases would be needed if inflation remained elevated, Waller said, or could slow or pause if inflation moderates in the second half as he expects.

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“Of course, it is possible that the state of the world will be different as a result of the Ukraine attack, and that may mean that a more modest tightening is appropriate,” Waller said.

But, he said, it is still far too early to read the impact of the conflict on the US or global economy. And with the fastest rise in consumer prices in 40 years, the Fed “must react decisively to the data in order to maintain our credibility that we will reduce inflation.”

Over the past week or so, Fed policymakers have largely indicated that they prefer to start the next round of U.S. interest rate hikes with a modest quarter-point hike, and after the invasion of the From Ukraine to Russia, traders cut bets on a bigger rally in March.

THE BALANCE SHEET A BIG QUESTION

But Waller’s remarks – which echo the views of St. Louis Fed Chairman James Bullard, his former boss – suggest Fed Chairman Jerome Powell will be grappling with a divided policy-making committee. at its meeting on March 15 and 16.

As Waller made what he called a “strong case” for a 50 basis point rate hike in March against the backdrop of a full-employment economy and “alarming” inflation, futures contract negotiators Interest rate futures raised bets on such an increase, putting the odds at around 25%, about double what was seen earlier in the day.

Two other reports on inflation – one of which comes on Friday – and a report on the labor market, as well as the situation in Europe, will feed into the Fed’s policy decision. The question is not only whether to “front” rate hikes as Waller and Bullard suggest, but also how far to raise rates and how quickly to shrink the Fed balance sheet to tighten policy enough. monetary policy to slow demand and contain inflation.

On Thursday, Waller said the Fed should allow the balance sheet to deplete much faster than in 2017, when it last let its holdings shrink, in light of the currently much stronger economy and of what is now a much larger balance sheet.

The Fed should not limit how quickly mortgage-backed securities sell, he said.

“With large caps and significant amounts of securities maturing over the next year or two, I don’t see the need to consider asset sales anytime soon,” Waller said, although “down the road” the Fed may consider selling MBS. .

As the Fed makes decisions on policy, Waller said, it needs to “urgently” watch the data, noting how little had forecast inflation to rise in 2021, and its own surprise at how much the latest COVID surge had slowed the economy.

“I will continue to monitor the geopolitical situation to assess the appropriate timing for this near-term monetary policy tightening,” Waller said. “These actions will take us into the second half of the year, when we will have six months of inflation data, and we can assess what the appropriate path will be for the remainder of 2022.”

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Reporting by Ann Saphir; Editing by Leslie Adler and Lincoln Feast.

Our standards: The Thomson Reuters Trust Principles.

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