(Bloomberg) — San Francisco Federal Reserve President Mary Daly said she favors raising interest rates “gradually” and moving on to shrinking the Fed’s balance sheet more quickly than in the last tightening round.
“I would prefer to adjust the policy rate gradually and move into balance-sheet reductions earlier than we did in the last cycle,” she said in a virtual panel discussion at the Allied Social Science Associations conference Friday. “I would not prefer to do it simultaneously,” she said, adding “you could imagine adjusting the balance sheet” after “one or two hikes.”
Fed policy makers believed a stronger economy and higher inflation could warrant rate hikes “sooner or at a faster pace” than they previously expected, according to minutes of the Dec. 14-15 policy meeting released Wednesday.
In December, the Federal Open Market Committee announced it would wind down the Fed’s bond-buying program at a faster pace than first outlined at the previous meeting in early November, citing rising risks from inflation. The pace now ends purchases in March. Officials have also started debating how to reduce the $8.8 trillion balance sheet, though no decisions on timing have been made.
Yesterday, St. Louis Fed President James Bullard, who votes on policy this year, said policy makers could start to raise their target interest rate as soon as March and shrink the central bank’s balance sheet as a next step in response to surging inflation.
He said favored three interest-rate hikes in 2022 in his December forecast submitted for the “dot plot” last meeting, and places a priority on getting started early, giving the central bank flexibility for more or fewer hikes later.
Earlier Friday, Labor Department data showed the unemployment rate fell more than forecast to 3.9% in December while wages jumped, reinforcing investor bets the Fed will start raising borrowing costs in March.
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