by Howard Schneider
WASHINGTON, Jan 11 (Reuters) – High inflation and a strong economic recovery will force the Federal Reserve to raise interest rates at least three times this year and justify a rapid reduction in its balance sheet, a estimated Raphael Bostic, the president of the Atlanta Fed.
“There is a risk that inflation will be elevated for an extended period and we must respond directly, clearly and aggressively,” Raphael Bostic said in a Reuters interview on Monday.
He added that if inflation persists, March would be “a reasonable possibility” for the first in a series of rate hikes, to try to rein in inflation which is well above the institution’s 2% target.
According to him, the resurgence of contamination by the coronavirus is not able to start the recovery. But he believes the rise in prices is more likely to intensify – which would require a fourth quarter-point rate hike in 2022 – than to slow.
His remarks illustrate the more restrictive turn taken by the Fed to fight inflation since the meeting in December during which it decided to end its purchases of bonds on the markets in March.
Raphael Bostic, who is not voting at Fed meetings this year, said the US central bank should be more aggressive in managing its balance sheet, shrinking its size at the rate of at least $100 billion a month, and by planning to quickly withdraw from the markets at least 1.500 billion dollars which he considers to be pure “excess liquidity”.
There is no need for the Fed to gradually reduce its balance sheet because the markets know what to expect.
“Hopefully we will act fast enough and get out of this emergency position,” Raphael Bostic said. “The tool is quite well understood and the motivation is quite well understood,” he continued, adding that the mechanism is expected to last two years.
The Fed has purchased more than $4 trillion in government bonds and securitized home loans since the COVID-19 pandemic, more than doubling the size of its balance sheet from $4.1 trillion to more of 8,700 billion. (Report Howard Schneider, French version Laetitia Volga, edited by Sophie Louet)
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