Bullard: Fed “credibility is on the line” in inflation fight

St. Louis Fed President James Bullard speaks about the U.S. economy during an interview in New York February 26, 2015. REUTERS/Lucas Jackson/File Photo

WASHINGTON, Feb 14 (Reuters) – St. Louis Federal Reserve president James Bullard on Monday reiterated calls for a faster pace of Fed interest rate hikes, saying that four strong inflation reports in a row warranted action and that the central bank needed to “ratify” market expectations of its upcoming moves.

Bullard, who himself helped shape those expectations with calls last week for a 50 basis point increase at the Fed’s March meeting, said on CNBC that the Fed’s “credibility is on the line” in its quest to bring inflation down from the current 40-year high of more than 7%.

“It was really October, November, December, January that called into question any idea that this inflation was naturally going to moderate in any reasonable time frame without the Fed taking action,” said Bullard.

He feels the Fed’s response should involve a full percentage point of rate increases over the Fed’s three meetings between now and July 1, slightly faster than he had suggested before. That implies at least one hike of a half percentage point at one of those meetings instead of the quarter point increases that the Fed has used in recent years.

His comments, coupled with a stronger than expected January inflation report, pushed up yields on the 2-year Treasury, often considered a proxy for the direction of Fed policy. It also helped prompt traders in contracts tied to the Fed’s target interest rate that a half-point increase in March was coming.

Other Fed bank presidents have pushed back – modestly – on that idea, cautioning that no decisions had been made.

None of the Fed’s governors, and most notably Fed chair Jerome Powell, have spoken publicly to the matter since the central bank’s last meeting in January.

Bullard said he would defer to Powell on the sequencing of coming rate increases. But he also said the Fed at this point needed to “follow through” with what markets anticipate, and in effect lock in the tighter financial conditions seen in rising interest rates for 2 year Treasury bonds.

Powell is “very good at managing the committee,” Bullard said. But “the Fed has to follow through and ratify those expectations that have been built into the 2 year, and if we don’t then it makes it appear that we are not defending” the 2% inflation target.

“I think my position is a good one and I will try to convince my colleagues, said Bullard, a voting member on Fed policy this year.

Reporting by Howard Schneider
Editing by Chizu Nomiyama

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