Rate fears hit home
Hawkish Fed talk on inflation spooks markets
Stocks plunged, with the Dow suffering its worst week since January after a Federal Reserve official said the next interest rate hike could come as soon as next year.
The Dow Jones Industrial Average lost 533 points, or 1.6 percent, to close at 33,290 on Friday, leaving the blue-chip index down more than 3 percent for the week.
The S&P 500 fell 0.8 percent, while the tech-heavy Nasdaq dropped 0.6 percent.
Policymakers had signaled Wednesday they expect the initial rate hike to be in late 2023, sooner than most members expected at the Fed’s meeting in March.
But St. Louis Federal Reserve President James Bullard called the revised timeline “hawkish” and said on CNBC Friday that he sees the Fed increasing rates by the end of next year amid white-hot inflation.
“We’re expecting a good year, a good reopening. But this is a bigger year than we were expecting, more inflation than we were expecting,” Bullard told CNBC.
“I think it’s natural that we’ve tilted a little bit more hawkish here to contain inflationary pressures.”
The broader Federal Open Market Committee on Wednesday revised its forecasts, raising expectations for inflation to 3.4 percent, up from 2.4 percent predicted in March.
The committee also increased its outlook for GDP growth to 7 percent from 6.5 percent.
“Overall, it’s very good news,” Bullard said of the trajectory of the US economy.
“You love to have an economy growing as fast as this one, you love to have a labor market improving the way this one has improved.”
Bullard noted, though, that the rapid economic recovery is bringing faster-than-expected inflation. Fed officials had previously said they would let inflation remain slightly higher than 2 percent as the economy reopens.
Bullard said he expects to see inflation running at 3 percent this year and 2.5 percent next year before falling back to the Fed’s target of 2 percent.
Separately Friday, Minneapolis Federal Reserve President Neel Kashkari told Reuters he wants to keep the US central bank’s benchmark short-term interest rate near zero at least through the end of 2023 to allow the labor market to return to its prepandemic level.
Kashkari’s remarks show he’s in a decided minority in an increasingly hawkish Fed.
think it’s natural that we’ve tilted a little bit more hawkish here to contain inflationary pressures.
— St. Louis Federal Reserve President James Bullard