St. Louis Federal Reserve President James Bullard told CNBC on Friday that he expects an initial rate hike in late 2022 as inflation picks up faster than previous forecasts.
This estimate is even faster than the outlook that the broader Federal Open Market Committee released on Wednesday, which hit the financial markets. The committee's median outlook was for up to two hikes in 2023 after hinting in March that no hikes were in sight.
Bullard described the Fed's moves in several places this week as "hawkish" or in favor of tighter monetary policy than since the beginning of the Covid-19 pandemic.
"We expect a good year, a good reopening. But this is a bigger year than we expected, more inflation than we expected," said the central bank official in the "Squawk Box". "I think it is natural that we should be a little more restrictive here in order to contain inflationary pressures."
The FOMC's revised forecasts reflect this sentiment.
For 2021, the committee raised its core inflation expectations, as measured by the consumer spending price index, to 3% from the March estimate of 2.2%. It also raised its median estimate for inflation, including food and energy prices, to 3.4%, a full percentage point jump from the previous outlook.
At the same time, the committee raised its outlook for GDP growth from 6.5% to 7%. As recently as December, the committee was aiming for growth of just 4.2%.
"Overall, it is very good news," said Bullard of the economic development during the reopening. "You love to have an economy that is growing as fast as this one, you love to have a labor market that improves as this has improved."
However, he cautioned that growth would bring faster-than-expected inflation, adding that "you might even see some upside risks" to price pressures, which, after some action, are at their highest levels since the early 1980s.
That is why he thinks it makes sense to start raising interest rates as early as next year. The Fed cut its key rate to near zero at the beginning of the pandemic and has kept it there ever since.
Bullard said he sees inflation of 3% this year and 2.5% in 2022 before falling back to the Fed's 2% target.
"If you think that's going to happen, then by the end of 2022 you have two years of inflation of two and a half to 3%," he said. "To me, this would be in line with our new framework where we said inflation will be above target for some time, and from there we could bring inflation down to 2% over the following period."
Bullard is not a voting member of the committee this year, but will have a vote next year. Exchange futures added briefly to the losses, while 10-year government bond yields ticked higher than Bullard said.
The other dynamic in Fed policy is buying at least $ 120 billion. Bullard said he thinks it will be several months before the central bank decides how to slow this pace.
He also warned that given the uncertain economic momentum ahead, monetary policy will also stay in flux.
“These are things that are far in the future, in an environment where we have a lot of volatility, so it's not at all clear that any of these will work out the way everyone is talking. So we have to meet by meeting to see what happens, "he said.
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