By Ann Saphir

(Reuters) – Federal Reserve Governor Christopher Waller on Thursday laid out the case for a “concerted” effort to rein in inflation, calling for raising interest rates a full percentage point by mid-year, starting with a half-percentage-point hike in March if data in coming weeks continues to point to an “exceedingly hot” economy.

Waller declared that “I believe appropriate rate policy brings target range up 1 to 1.25 per cent early in the Summer,” in remarks prepared to deliver to the University of California Santa Barbara Economic Forecast Project. Waller also stated that the Fed should begin trimming its balance sheet of $9 trillion “no earlier than” July’s meeting.

Waller indicated that, once initial rate hikes have been made for inflation, more increases are possible. If inflation slows or stops, Waller expects further increases to be required.

Waller stated that it was possible for the world to be in a different place after the attack on Ukraine. That could mean that some mild tightening may be necessary.

However, he stated that the time is not yet right to determine the effect of the conflict on either the U.S. economy or the global economy. With consumer prices at their highest point in 40 years, it is imperative that the Fed responds decisively to these data to preserve our credibility and assure inflation control.

The Fed’s policymakers have indicated a preference to begin the next round of U.S. rate increases with a quarter-point increase. After Russia invaded Ukraine, traders cut their bets for a larger March hike.

BALANCE SHEET A BIG QUESTION

Waller’s comments, which echo James Bullard of St. Louis Fed President James Bullard as his ex-boss, suggest that Fed Chair Jerome Powell may have to deal with a split policy-setting committee at its March 15-16 meeting.

The issue here isn’t whether or not to “frontload” rate increases, as Waller and Bullard recommend. It also involves how high to increase rates and how quickly to reduce the Fed’s balance sheet in order to tighten monetary policies enough to control inflation and slow down demand.

Waller stated Thursday that the Fed should let the balance sheet run faster than it did in 2017, when its holdings were shrinking. This is in view of the stronger economy and the larger balance sheet.

He said that the Fed shouldn’t limit how fast mortgage-backed securities can be liquidated.

Waller explained that there are large caps on securities and substantial amounts of securities due to mature over the next year. However, the Fed may consider MBS sales down the road.

Waller stated that the Fed must watch data as it makes policy decisions. He noted how few people could have predicted how high inflation would be in 2021 and how surprised he was at the extent to which the recent COVID spike had slowed the economy.

Waller added that “I will continue monitoring the geopolitical environment to evaluate the timing of near-term tightening in monetary policy.” This will allow us to enter the second half the year. We will then have six months’ worth of inflation data. Then we can determine the right path forward for the remainder of 2022.