MNI: Fed’s Waller Sees Possible Case For 50 BP Hike In March

Federal Reserve Board Governor Christopher Waller said Thursday the Fed could opt to raise interest rates by a half percentage point if incoming data ahead of the March meeting points to an overheating economy.

“If, for example, tomorrow’s PCE inflation report for January, and jobs and CPI reports for February indicate that the economy is still running exceedingly hot, a strong case can be made for a 50-basis-point hike in March,” Waller said in prepared remarks.

“In this state of the world, front-loading a 50-point hike would help convey the Committee’s determination to address high inflation, about which there should be no question.” His comments run counter to those made to MNI last week by San Francisco Fed President Mary Daly, who pushed against the need for such an aggressive move as an opening salvo of tightening.

Waller said it is still too early to gauge the effect of the developments in Ukraine on the world economy, but he was watching things closely

“Of course, it is possible that the state of the world will be different in the wake of the Ukraine attack, and that may mean that a more modest tightening is appropriate, but that remains to be seen,” he said.

BALANCE SHEET

Waller also said he supports starting the Fed’s balance sheet runoffs “no later than the July FOMC meeting,” and made the case for larger caps on purchases than during the last episode of QT.

Waller said outright asset sales do not need to be considered imminently but may be needed eventually.

“With large caps and sizable amounts of securities maturing over the course of the next year or two, I do not see the need to consider asset sales anytime soon,” he said.

“However, because the Fed’s mortgage-backed securities (MBS) holdings have long maturities and are quite sizable, prepayments are unlikely to bring these holdings down to de minimis levels over the next decade. So, MBS sales could be something the Committee considers down the road to satisfy our balance sheet principles long run goal of holding primarily Treasury securities.”

His hawkish tone was based on what he called alarming recent inflation readings, as well as an assessment that theU.S. economy has already reached full employment.

“My greatest concern is continued elevated inflation. Inflation is too high, and I think concerted action is needed to rein it in,” Waller said. The U.S. consumer price index jumped 7.5% in the year to January, a four-decade high.