Fed official suggests rates may rise as soon as March
Christopher Waller, a Federal Reserve governor, said it might be appropriate for policymakers to raise interest rates soon after they complete the bond-purchase program they had been using to support the economy — suggesting he thinks higher borrowing costs could be appropriate as early as March.
The Fed had been buying $120 billion in bonds each month for much of the pandemic, but it announced in early November that it would begin to slow those purchases down in a bid to stop pouring additional fuel into a rapidly growing economy. On Wednesday, the central bank said it would pare the buying back even faster, so that the program wraps up by midMarch. That will put Fed officials into position to raise interest rates — their more powerful and traditional tool — without worrying that their two policies are working at odds to each other.
“Given my expectations for inflation and labor market conditions, I believe an increase in the target range for the federal funds rate will be warranted shortly after our asset purchases end,” Waller said in a speech Friday, hinting at a rapid path ahead for returning monetary policy to a more normal setting.
The decision to wrap up bond purchases sooner, he said, is “providing flexibility for other adjustments to monetary policy, if needed, as early as spring to accommodate changes in the economic outlook.” He later clarified that he saw March as a potentially “live” meeting for a rate increase.
“We could be ready for a liftoff in March or May,” Waller said, if his expectations came to pass. He then noted that officials could watch to see how rate increases impacted the economy and if inflation slowed as expected later next year, potentially speeding up the pace if price gains remain brisk.
“Do some hikes, see what the impact is,” Waller said.
Waller’s haste came as he voiced concern about inflation, which has risen to the highest level in nearly 40 years, and optimism about growth.
Inflation “is alarmingly high, persistent, and has broadened to affect more categories of goods and services, compared with earlier this year,” Waller said.
Waller is just one of 12 people on the policy-setting Federal Open Market Committee, so his view on when interest rates should rise reflects his opinion, rather than standing as a clear signal of what is coming. But he may be giving voice to concerns that are becoming more widely shared among policymakers. Waller said the omicron coronavirus variant could hinder the labor market’s progress back to full employment, but it could also help to keep inflation high.
“We also do not know if omicron will exacerbate labor and goods supply shortages and add inflation pressure, derailing the moderation of inflation next year that is my baseline,” Waller said.
“We will have to be ready in the coming weeks to adjust as needed,” he later added.
His comments came on the heels of a CNBC interview in which John Williams, president of the Federal Reserve Bank of New York, suggested he did not expect that the central bank would need to move more quickly to end its bond-buying program than it had already signaled.
“We are ending the program pretty soon,” Williams said, adding that he did not see “any real benefit to trying to speed it up further — it’s really about getting our monetary policy stance in a good position.”
Williams said the goal with accelerating the end of the program was to create “optionality” — the ability to respond to inflation with higher rates if needed — without moving so abruptly that it created disruption in markets.
Rates are set to near-zero, but Fed officials released fresh projections this week showing that they expected to make three increases in 2022 and lift the federal funds rate to 2.1 percent by the end of 2024. That would make borrowing for mortgages, car loans and business expansions more expensive, slowing down the economy.
Waller seemed to see rate increases coming soon, but both he and Williams emphasized that the timing and pace of rate increases — which the Fed uses to make sure that growth does not overheat, keeping inflation elevated and potentially causing it to rocket out of control — would hinge on incoming economic data.
“It’s going to depend on the data,” Williams said, later adding, “I’m pretty optimistic, we are seeing strong improvement in the labor market.”