The U.S. economy won’t be derailed by the spreading delta variant of the coronavirus that causes COVID-10 because businesses and households have adapted to the pandemic, St. Louis Fed President James Bullard said Wednesday in an Barron’s Live interview with MarketWatch.
On Tuesday, Fed Chairman Jerome Powell was more cautious about the delta variant, saying it was still unclear how it might impact the economy.
Bullard said the economy has already made “substantial” progress — the benchmark for tapering the central bank’s $120 billion a month in asset purchases.
The St. Louis Fed president, who will be a voting member of the Fed’s policy committee in 2022, said he wants the tapering to finish by the end of the first quarter. That would give the Fed the option to begin to raise interest rates if inflation remained stubbornly high.
Bullard projected that inflation would decelerate to a 2.5% rate in 2022 from above 3% this year. But the risks of higher inflation were greater than of too-low inflation, he said.
In the interview, Bullard said he thinks the Fed should let its balance sheet shrink once the central bank has finished tapering.
That’s a twist from the Fed’s previous tapering episode in 2014. At the time, Fed officials wanted to see the central bank’s benchmark interest rate move substantially higher before allowing the balance sheet to shrink.
The balance sheet would shrink naturally as the Fed would not replace maturing securities. Bullard said his colleagues do not support the Fed selling bonds into the market.
The Bank of England has laid out a plan to sell bonds once its policy rate hits 1%.
Bullard said he opposed any move to raise the central bank’s inflation target to 3% from its current level of 2%. He said it would cause turmoil in financial markets. Earlier this week, several former Fed economists backed the move to a higher target.
Stocks were mostly lower on Wednesday following losses in the prior trading session, which saw the S&P 500
and the Dow Jones Industrial Average
both snap streaks of five consecutive record finishes.