The Federal Reserve is likely near the end of interest rate increases and the program to reduce the bonds it holds on its balance sheet, St. Louis Fed President James Bullard said Thursday.
“I think the message from my point of view is the normalization process in the United States is coming to an end,” the central bank official told CNBC in a “Squawk Box” interview.
Bullard added that he thinks rates are actually too high now but acknowledged that his view is in the minority on the policymaking Federal Open Market Committee. Bullard is a voting member of the FOMC and said he has tried to convince his fellow central bankers that they’ve gone “too far.”
In particular, he said the December rate hike, which was the fourth of 2018, was a mistake and helped trigger a negative market reaction.
“I thought at the December meeting, myself I thought it was a step too far. I argued against that move,” Bullard said. “We did get a bad reaction in financial markets. I think the market started to think we were too hawkish, might cause a recession.”
“I think all of this weighed on the committee and got people to change their thinking,” he added.
Indeed, 2019 has seen a pivot in Fed thinking, with minutes from the January FOMC meeting, released Wednesday, detailing the concerns officials had over the economy’s future path and the impact of the committee’s moves on how things develop.
In addition to a steady diet of rate hikes, the Fed had been reducing the size of a bond portfolio it had built up during its efforts to stimulate the economy during and after the financial crisis. The balance sheet had surged to more than $4.5 trillion, but the Fed has since reduced the bond holdings by more than $400 billion by allowing some proceeds from the assets to roll off each month without being reinvested.
The minutes indicated that the Fed likely will bring the balance sheet roll-off to a close by the end of 2019 as reserves get closer to the level where banks feel comfortable.
At the same time, officials indicated during the meeting that they now will take a “patient” approach to further tightening and will be guided by data before approving any additional rate increases.
Bullard said he expects a timetable for balance sheet program to be revealed “in the next couple of months.”
“I think we’re in a good place today,” he said. “We had a lot of success. People said it couldn’t be done.”
While U.S. interest rates are low historically, they’re actually high compared to the rest of the word, Bullard said. That’s part of the reason why he thinks rates could be cut.
“I actually think we’re a little bit tight here, a little bit too high with the rates,” he said. “But I’m in a minority view compared to the committee, I would say.”
As far as the balance sheet is concerned, Bullard said he was surprised that there remains a high demand for bank reserves, meaning the bond portfolio can stay at a higher level. “That’s going to mean a bigger balance sheet, that’s for sure,” he said.
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