Waller backs March Fed liftoff, Daly sees two or three 2022 hikes

Federal Reserve Governor Christopher Waller said a faster wind-down of the U.S. central bank’s bond-buying program positions it to start raising interest rates as early as its March meeting to contain inflation that is “alarmingly high.”

“The whole point of accelerating the tapering was to end it much faster in March so the March meeting could be a live meeting. That was the intent,” Waller said Friday in response to a question after a speech to the Forecasters Club of New York. “It’s going to depend on what the data comes in, but March is a live meeting for the first rate hike.” The Federal Open Market Committee meets March 15-16.

Fed Chair Jerome Powell and his colleagues agreed on Wednesday to double the pace at which they wind down their bond-buying program, putting them on track to wrap it up by mid-March, and signaled they expected three increases in their benchmark federal funds rate would probably be appropriate in 2022.

“My outlook is that it’s a very likely outcome that it could happen in March,” Waller said. “It would take something like severe disruption from omicron to delay labor market improvement or keep unemployment from falling, to keep March from being a key date to think of for liftoff.”

He was one of three Fed officials speaking Friday as policy makers ended their post-meeting blackout on public comments.

San Francisco Fed President Mary Daly told an online event hosted by the Wall Street Journal that she expected “two or three rate increases next year would be appropriate” if the omicron variant of Covid-19 doesn’t derail the economic recovery.

New York Fed chief John Williams separately said higher rates next year were “likely,” adding that “actually raising interest rates would be a sign of a positive development in terms of where we are in the economic cycle.”

Once the Fed ends the bond-buying program, it needs to decide if it wants to maintain the size of the balance sheet through reinvestment of maturing assets, or begin to let it shrink by allowing them to run off.

Powell told reporters on Wednesday that a discussion had begun on the balance sheet but no decisions had been taken on when runoff would start. 

Waller said he wanted to go “sooner and faster” than last time -- when the Fed waited three years between ending the purchase program before starting to let the balance sheet shrink -- and argued this might mean fewer rate hikes.

“If we start doing some balance sheet runoff by summer, that’ll take some pressure off, you don’t have to raise rates quite as much,” he said. “My view is we should start doing that by summer.”

He also favored getting the size of the balance sheet back to around 20% of gross domestic product versus 35% today, with a focus on increasing the share of Treasuries versus mortgage-backed securities.

“I would like any runoff of MBS to be reinvested, if we’re doing reinvestment, back into short-term Treasuries,” he said.

In his speech, Waller said he expects the U.S. economy and employment to continue growing very strongly through at least the first half of next year. Inflation “is alarmingly high, persistent, and has broadened to affect more categories of goods and services,” he said.

Calling the omicron variant of Covid-19 a “big uncertainty” for his outlook, Waller said that it could aggravate labor and goods supply shortages and add inflation pressures, potentially derailing the moderation of price gains he expected to see next year.