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Fed's Bullard warns that too many rate hikes this year could slow the economy too much

  • Central bankers need to follow the economy, which is showing strength but still little inflation, says St. Louis Fed President James Bullard.
  • Bullard says he doesn't expect the years of below-target inflation to change rapidly.
  • Wall Street expects the Fed to raise rates at next month's meeting and at least two more times in 2018.

Central bankers need to be careful not to increase interest rates too quickly this year because that could slow the economy too much, St. Louis Federal Reserve President James Bullard told CNBC on Thursday.

Wall Street expects the Fed to raise rates at next month's meeting, in the first of what's seen as at least three total hikes in 2018. The Fed increased the cost of borrowing money three times last year to the current range of 1.25 to 1.50 percent.

Hiking rates by a total of 1 percent this year, which would signal four increases of the typical 0.25 percent, would be "priced for perfection," Bullard said.

"The idea that we need to go 100 basis points in 2018, that seems like a lot to me," he said. "Everything would have to go just right. The economy would have to surprise on the upside a bunch of times during the year. I'm not sure that's a good way to think about 2018."

The Fed needs to follow the economy, which is showing strength but still little inflation, Bullard said, adding he doesn't expect the years of below-target inflation to change rapidly. "We've got a ways to go on this inflation story."

"One thing I'm concerned about is if [there's] a bunch of hikes this year Fed policy will turn restrictive," he said. "The neutral fed funds rates is pretty low." The fed funds rate is a key short-term interest rate that banks use to lend each other money overnight.

Bullard appeared on "Squawk Box" one day after the release of the minutes from the Fed's January policy meeting. Central bankers held interest rates steady last month but indicated optimism about the economy and inflation moving higher toward the Fed's 2 percent target.

"It was natural for us to be meeting in January and saying good things about 2017," he said, considering the U.S. and the global economy surprised to the upside.

The Fed should only move from a reactive to a proactive stance only if inflation moves to target with expectations of further price pressures on the horizon, said Bullard, who is not a voting member on the central bank's policymaking Federal Open Market Committee. But he's still part of the conversation.

On Thursday, the central bank's newest member, Fed Governor Randal Quarles, said Tokyo that below-target inflation should not stand in the way of future rate increases. "After assessing the recent data, my take is that the current shortfall in inflation from target is most likely due to transitory factors that will fade through 2018, pushing inflation back up to target," said Quarles, who has an FOMC vote.

Investors and traders have been nervous lately about economic growth running too hot and inflation overshooting and whether those conditions might lead the Fed to increase rates more aggressively than planned.

Wall Street got off to an incredibly strong start in January after a banner 2017.

But the stock market tanked in early February after a higher-than-expected wage number in January's jobs report sparked fears of inflation and rising rates. Stocks on a closing basis eventually bottomed out on Feb. 8, briefly plunging into 10 percent correction territory. The market had been up for six-straight sessions before declines on Tuesday and Wednesday.

Fed Chairman Jerome Powell, who took over for Janet Yellen, was sworn in on Feb. 5 as the stock market was melting down.

While stocks were swinging all over the place, the 10-year Treasury yield was spiking to around four-year highs just below 3 percent.

Bullard said the Fed does not have to hurry on rates because the bond market has been doing some of the heavy lifting.

"I don't think we need to chase the 10-year up," he said. "If the long end is moving up in tandem with better growth prospects worldwide, then the bond market is doing our work for us."

As for fiscal policy, he said he's encouraged by some of the policies of President Donald Trump and Republican leaders on Capitol Hill. "I like the deregulatory agenda. I think the tax plan has some chance of working and firing up investment."

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