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Fed’s Bullard says he expects first rate hike late next year

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St. Louis Federal Reserve President James Bullard said Friday he expects the central bank to raise its benchmark interest rate in 2022 given his forecast for above-target inflation.

In an interview on CNBC, Bullard said it was “natural” for the Fed to tilt hawkish at its meeting earlier this week given recent strong inflation readings.

On Wednesday, seven of 18 Fed officials said they expected the first rate hike to occur next year, up from four officials in March.

Bullard said the Fed was surprised how strong the economy has been this year. Last December, the central bankers forecast a 4% GDP growth rate this year. Earlier this week, they raised their estimate to 7%. They upped their core PCE inflation forecast to 3% from 1.8% in December.

“We were expecting a good year, but this is a bigger year than we were expecting, more inflation than we were expecting. And I think it’s natural that we’ve tilted a little bit more hawkish here to contain inflationary pressures,” Bullard said.

The Fed is buying $80 billion of Treasurys and $40 billion of mortgage-backed securities, along with keeping interest rates close to zero, to support the economy.

Bullard said he expected “in-depth discussions” of slowing the asset purchases would start now that Fed Chairman Jerome Powell had opened the door for the debate. It may take “several meetings” for the Fed to “get organized,” he added. The Fed meets every six weeks. The next meeting is in late July.

Bullard said he was “leaning” toward supporting an end to the purchases of mortgage backed securities given the “booming housing market” and talk about a bubble in the sector.

“I would be a little concerned about feeding into the housing froth that seems to be developing,” Bullard said.

“I’m leaning a little bit toward the idea that maybe we don’t need to be in mortgage-backed securities,” he said.

The Fed holdings of mortgage-backed securities have risen almost $1 trillion since last March, according to economists at Jefferies.

In the wake of the Fed meeting, many economists think the central bank could start slowing down the pace of its asset purchases in December after announcing the program in September given that Powell said the committee would give advance notice before any decision.

Bullard’s comments are the first by a Fed official other than Powell after the central bank’s two-day meeting that ended Wednesday.

Although economists expected the Fed to be somewhat hawkish, many were surprised by the Fed’s “dot-plot” which now shows the median Fed forecast of two interest rate hikes in 2023. Before the meeting, the Fed hadn’t penciled in any moves until 2024 at the earliest.

Bullard said he penciled in a rate hike starting next year because core PCE inflation will be 3% this year and 2.5% next year. He cautioned there was a lot of volatility in the economy and his forecast could change.

Bullard is not currently a voting member of the Federal Open Market Committee, the policy setting committee of the central bank, but he will be in 2022.

U.S. stocks
DJIA,
-1.30%

SPX,
-1.04%

were sharply lower Friday after Bullard’s comments and the yield on the 10-year Treasury note
TMUBMUSD10Y,
1.449%

moved higher.