Fed Bullard Concerned About January’s CPI Data

St. Louis Federal Reserve President James Bullard said on Thursday that he has become “dramatically” more hawkish in light of the hottest inflation reading in nearly 40 years, and he now wants a full percentage point of interest rate hikes over the next three U.S. central bank policy meetings.

Within minutes, Bullard’s view became the market’s view, with rate futures contracts now fully pricing an increase in the Fed’s target range for its policy rate to 1%-1.25% by the end of its policy meeting in June, with some bets on an even steeper rate hike path.

“I’d like to see 100 basis points in the bag by July 1,” Bullard told Bloomberg News in an interview, after a U.S. government report showed inflation rose 7.5% in the 12 months through January.

With only three Fed meetings between now and July 1, Bullard’s comments point to at least one half-percentage-point rate hike, a big move the Fed hasn’t made in any recent rate-hiking cycle.

Contracts traded at CME Group are now fully pricing in a half-percentage-point interest rate increase in March – up from about a 25% chance of such a hike on Wednesday.

Before Thursday, most economists and analysts had expected the Fed to move only in regular quarter-percentage-point increments.

James Bullard said that he favours the first half-point rate hike since 2000 and defers to chair Jerome Powell on a potential for a 50bps rate hike in March.

Bullard favours 100bps rate hikes by July and for the balance sheet reduction start in in the second quarter. He explained that the balance sheet reduction may require asset sales and that he is concerned about the January inflation print. He said that the Fed should be open to considering an inter-meeting increase.

These remarks have boosted US yields with the 2-year yield now up 20 basis points on the day. US Interest Rates Futures now show a 60% chance of a 50-bps hike in the March meeting after Fed’s Bullard’s comments.