The feud between “hawks” and “doves” continues to rage within the US Federal Reserve.
After the March meeting, the central bank announced that for the first time since 2018 it would raise the federal funds rate, and now accelerating inflation promises to make this restrictive monetary policy more aggressive.
The Chairman of the Federal Reserve Board of St. Lewis and James Bullard warned on Monday that the Fed needs to raise interest rates to about 3.5% this year, with several half-percentage point increases, and that it should not rule out 75 basis points of increases. Since 1994, the US has not seen such a significant rise in interest rates.
At its last meeting in March, the central bank decided to increase the federal funds rate by 25 basis points, thus moving it to a range between 0.25% and 0.50%. This was the first increase since December 2018.
In the middle of last month, Federal Reserve Chairman Jerome Powell acknowledged that if inflation requires it, it is possible to raise interest rates by more than 25 basis points one or more times this year.
During the meeting, the central bank also indicated that the institution should start reducing the huge number of bonds it holds on its balance sheet, at a maximum rate of US$95 billion (€86.7 billion) per month, further tightening its position. to combat inflation.
Since then, many members of the hawkish wing of the Fed, of which Pollard is a part, have called for tighter monetary policy with a much broader increase in interest rates in order to contain inflation that is already renewing its highs since the 1980s.
During Monday’s conference, Bullard insisted that the federal funds rate should be set at 3.5% this year, well above the central bank’s estimate of 2.4%. “We can’t do everything at once, but I think it’s up to us to get to that level by the end of the year,” the Fed’s regional leader said.
Given criticism from analysts who claim that excessively restrictive monetary policy could put the US into a recession, the St. Louis Fed leader is defending the phenomenon prematurely, with the central bank raising interest rates only once this year.
Pollard also predicted that he believes the unemployment rate will be below 3% this year and that the US economy will register a healthy growth rate, both this year and in 2023.
“The fact that Pollard is talking about a 75 basis point increase means that there are other hawkish members who share the same view,” Bloomberg quoted Stephen Innes of SBI Asset Management as saying.