By Howard Schneider
WASHINGTON (Reuters) -The Federal Reserve will likely need to raise interest rates higher than expected as U.S. regulators' "swift" response eases stress in the banking sector while the economy and inflation remain stronger than expected, St. Louis Fed President James Bullard said on Friday.
Bullard, speaking to reporters, said he had raised his estimate of how high the Fed's benchmark overnight interest rate needs to rise by the end of 2023 by a quarter of a percentage point to a 5.50%-5.75% range, even as the bulk of his colleagues this week kept their estimates steady at a level between 5.00% and 5.25%.
An advocate of reaching an endpoint for rates higher and faster than many of his peers, Bullard said he lifted his rate projection "in reaction to the stronger economic news and also on the assumption that the financial stress abates in the weeks and months ahead."
He said it would be up to Fed Chair Jerome Powell to decide on the tactics and timing around any further increase in borrowing costs, and acknowledged "there could be a downside scenario" of worsening bank stress that reshapes monetary policy.
But Bullard said he put an 80% probability on financial stress passing, and anticipates that by later in the spring or summer the Fed's focus will have returned to lowering inflation back to the 2% target and the need to "ratchet up" interest rates to make it happen.
He said the collapse earlier this month of Silicon Valley Bank was "quirky," a result of "unusual" conditions at a lender focused on the tech community that are not apparent in other banks.
INFLATION 'TOO HIGH'
In earlier comments to a St. Louis community group, Bullard said he was confident that "continued appropriate macroprudential policy can contain financial stress," while leaving monetary policy free to focus on inflation, which is running at more than double the Fed's target.
The U.S. central bank this week raised rates by a quarter of a percentage point and said in a statement that a further tightening of monetary policy "may" be needed.
But Fed officials' projections for a possible endpoint for the benchmark overnight interest rate remained at around 5.1%, the same as in December, implying just one more quarter-of-a-percentage-point hike from the current 4.75%-5.00% range.
The policy statement also dropped language saying that "ongoing increases" in rates would be necessary. This change puts the timing and extent of the Fed's next move in doubt as officials assess the fallout from the failures of SVB and Signature Bank (NASDAQ:SBNY) , and broader doubts about the health of the banking system.
Bullard said it was "relatively common" for some financial firms to fail to "adjust their businesses appropriately" as financial conditions change, noting events like the collapse of Continental Illinois bank in 1984 and the 1998 collapse of Long-Term Capital Management.
"These events received considerable attention at the time, but were not ultimately harbingers of poor U.S. macroeconomic performance," he said.
Meanwhile U.S. growth and the job market continue to outperform, while inflation has come down but "remains too high."