By Howard Schneider
WASHINGTON (Reuters) – An interest rate increase will likely be warranted “shortly after” the Federal Reserve ends its bond purchases in March, with inflation “alarmingly high” and the job market near maximum employment, Federal Reserve Governor Chris Waller said on Friday.
The Fed this week agreed to accelerate the end of its pandemic-era bondbuying to March, a precursor to raising rates, as policymakers acknowledged inflation was not easing as quickly as expected and required them to be ready to act by imposing higher borrowing costs.
Waller said rate hikes also may need to come sooner than expected.
“The appropriate timing for the first increase in the policy rate…will depend on the evolution of economic activity,” he said in prepared remarks to the Forecasters Club of New York. “But 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.”
“Like others, I expected that markets would adjust quickly” to the economic reopening and that global supply and U.S. labor markets would snap back to normal, Waller said. “Clearly that isn’t happening.”
While the new Omicron variant poses the risk of slower growth and a slowed recovery, “cutting the other way, we also do not know if Omicron will exacerbate labor and goods supply shortages and add inflation pressure,” he said.
The Fed this week signaled it may need to raise rates in three 0.25 percentage point steps this year in response to inflation running at multi-decade highs and well above the central bank’s 2% target.
Waller was among the earliest Fed officials last year to argue that the turn away from pandemic-era stimulus should happen sooner than later because of the risk inflation would prove more persistent than initially expected – a view adopted by his colleagues as the fall progressed and price continued rising.
(Reporting by Howard Schneider; Editing by Chizu Nomiyama)
