By Ann Saphir and Lindsay Dunsmuir
(Reuters) -Federal Reserve policymakers on Wednesday signaled they stand ready to take more aggressive action to bring down unacceptably high inflation, including a possible half-percentage-point interest rate hike at the next policy meeting in May.
"I have everything on the table right now. If we need to do 50 (basis points), 50 is what we'll do, " San Francisco Fed President Mary Daly said at an event organized by Bloomberg. "With the labor market so strong, inflation, inflation, inflation is top of everyone's mind."
Daly has often been more cautious than her colleagues about policy tightening, and her openness to a bigger-than-usual rate hike at the May 3-4 meeting shows a rising sense of urgency that swift and concerted action is needed to stop inflation, running at three times the Fed's 2% target, from getting entrenched.
Accelerating inflation "has necessitated, I think, all of us to think more about how fast they're going to have to go in order to keep inflation under control," St. Louis Fed President Bullard told the Mid-Size Bank Coalition of America. "We have to think bigger, maybe, than we thought about in the past."
Bullard was the lone dissenter last week on the U.S. central bank's March 16 decision to raise the benchmark overnight interest rate by a quarter of a percentage point from the near-zero level. Bullard said a half-percentage-point hike was appropriate to kick off the tightening cycle and he wants the policy rate to rise to 3% this year.
It's now clear Bullard is far from a lone voice in advocating for more aggressive action, especially given a growing sense that higher oil, wheat and other commodity prices stemming from Russia's invasion of Ukraine will only worsen the inflation picture, while doing little to dent economic growth.
Fed Chair Jerome Powell earlier this week said the central bank would move "expeditiously" to move interest rates up after last week's hike, and left the door wide open to a larger jump in borrowing costs at the May meeting.
Fed policymaker forecasts released last week signaled most saw the policy rate rising to 1.9% or higher by the end of the year.
"I would like to front-load some of that," Cleveland Fed President Loretta Mester said on Wednesday in a call with reporters when asked about the path of interest rate increases this year. "That better positions us if we do it earlier rather than later for what happens in the second half of the year."
Mester wants the federal funds rate to increase to about 2.5% by the end of the year, the level she sees as neither braking nor boosting the economy, and which would require "some" 50-basis-point rate rises.
Markets have taken that view on board, with traders pricing in two half-percentage-point hikes in coming meetings, and a year-end policy rate range of 2.25%-2.5%.
BALANCE SHEET REDUCTIONS
Powell, speaking to a National Association for Business Economics conference on Monday, also said May could mark the start of reductions in the central bank's nearly $9 trillion balance sheet, which ballooned during the COVID-19 pandemic as policymakers strove to bolster the economy.
Trimming the Fed's portfolio of Treasuries and mortgage-backed securities would put further downward pressure on inflation, providing what Daly said on Wednesday would be the equivalent of at least one quarter-percentage-point rate hike this year.
"I think the data will tell us whether 50 basis points, or 25 basis points with the balance sheet, is the right recipe; or 50 basis points with the balance sheet," she said.
Daly said she thinks the federal funds rate will likely need to rise above 2.5%, but probably not until next year. Still, she said, "we're prepared to do whatever it takes to ensure price stability, and in the wake of all of the other challenges that we have."
Mester also told reporters there is nothing to stop the Fed from hiking rates and beginning to reduce its balance sheet at the same policy meeting.
"I think given the situation we're in and the communications that Chair Powell has already made about the balance sheet process, I don't have concerns that that would be destabilizing, and I think that we have to recognize inflation is very elevated," Mester said, noting that financial markets could handle such a move. "We have to do what we can with both our policy tools to get inflation under control."
Bullard on Wednesday repeated his preference for the Fed to immediately start paring its balance sheet, with asset sales possible later on if inflation remained high.
(Reporting by Lindsay Dunsmuir and Ann Saphir; Editing by Paul Simao)