More aggressive Fed stance best to ensure longer expansion

Reuters reported that the Federal Reserve should let its roughly $8 trillion balance sheet shrink next year as soon as it winds down a bond purchase program, St. Louis Federal Reserve president James Bullard said, cautioning high inflation may require more aggressive steps by the central bank including two interest rate hikes in 2022.

''In an interview Bullard said he now expects inflation to remain at 2.8% through next year, well above the central bank's 2% target and the highest among new economic projections issued by Fed officials last week. While Bullard said he agrees inflation will ease somewhat on its own, he said it will take more central bank effort to ensure that happens smoothly over time, and never requires the sort of restrictive policies that could imperil the current expansion.

Inflation "is going to stay above target over the forecast horizon. That is a good thing. We are delivering on our...framework," Bullard said of Fed projections last week that inflation will remain above 2% through 2024, even as interest rates remain below the level that would be considered restrictive.''

Market implications

While Bullard remains extremely hawkish, the Fed taper is not a done deal for November and some Fed members have aired on the side of caution which makes next week's Nonfarm Payrolls event key for markets. 

However, the dollar is better bid as markets begin to price in sticky inflation. US Treasury yields moved up to their highest levels since June as investors priced for the US Federal Reserve's timeline to tightening its monetary policy sooner than expected. This was sparked by comments from Treasury Secretary Janet Yellen who said she expected inflation to end 2021 near 4%.