Fed’s Bullard Pencils in Rate Increase in 2022, Questions Mortgage-Bond Buying

The Federal Reserve Bank of St. Louis President James Bullard said the economy is seeing more inflation than he and his colleagues had expected, and noted that while there is substantial uncertainty about the outlook, it could lead to a rate increase next year.

Speaking Friday on CNBC, Mr. Bullard said that when he submitted forecasts at this week’s Federal Open Market Committee meeting, “I put us starting in late 2022” with the first move up from what are now near-zero short-term interest rates.

At the FOMC meeting earlier this week, central bankers opened the door to the option of paring back some of the massive stimulus they have been providing the economy since the pandemic last year. Officials projected a stronger economic outlook with notably more inflation this year, and penciled in two rate increases next year, compared with expectations of no change in their interest-rate target at the March policy meeting.

“The inflationary impulse, I think, is more intense than we were expecting,” Mr. Bullard said. “You could see even some upside risks to the inflation forecast, but that’s okay” given that the central bank had hoped to get inflation back up over 2% for a time to make up for extended periods of falling short of that goal, he said. At the Fed meeting, officials projected 3.4% inflation this year, up from the 2.4% forecast made in March.

Mr. Bullard also noted that Chairman Jerome Powell opened the door on Wednesday to a central bank debate on paring back on bond-buying stimulus efforts. The Fed is currently buying $80 billion per month in Treasury bonds and $40 billion per month in mortgage bonds to help smooth markets and provide stimulus beyond what its near-zero short-term rate target can deliver.

“The taper discussion is open and the chair made that very clear. But it’s going to take several meetings to get organized on all these different points,” Mr. Bullard said, suggesting a pull back in the buying isn’t imminent.

But added that monetary policy makers can be “nimble.” “Look at this data look at how outsized all these numbers are and how volatile everything has been, I think we’re going to have to be more state contingent,” compared to the past, which means the central bank may have to actively adjust its policy stance rather than put things on autopilot.

Mr. Bullard questioned whether the Fed should still be buying mortgage-bond securities given the strength of home sales.
“I’m leaning a little bit toward the idea that maybe we don’t need to be in mortgage-backed securities with a booming housing market and even a threatening housing bubble here, according to some people,” Mr. Bullard said. “We don’t want to get back in the housing bubble game that cost us a lot of distress in the 2000s,” he said.

Mr. Bullard did offer a caveat to his outlook. The nation “is in an environment where we’ve got a lot of volatility, so it’s not at all clear that any of this will pan out the way anybody’s talking about,” he said.

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