Bullard Raises Rate View, Wants Fed to Consider Shrinking Balance Sheet

Federal Reserve Bank of St. Louis President James Bullard said Friday the U.S. central bank should think seriously about shrinking its massive balance sheet starting next year, in an interview in which he also acknowledged moving his interest-rate outlook higher.

The big upward move in bond yields seen since the election indicates to him the need for a rate rise in 2017, Mr. Bullard told The Wall Street Journal Friday. Ahead of the Fed's policy meeting this week, where the central bank raised rates for the first time in a year, Mr. Bullard favored a single rate rise and then no additional action for the next few years.

"The contours of our outlook for the U.S. economy are the same" as they have been, despite the surprising outcome of the U.S. election in November, Mr. Bullard said. "We've probably got more upside risk than we had before, and we did make the one adjustment to the policy rate, and we suggested that policy rate move could be made in 2017."

The shift in bond-market borrowing costs is the key issue in Mr. Bullard's rate outlook change. He said half of what has driven yields higher, and bond prices down, is a welcome increase in inflation expectations. The other half is an expectation of higher real returns, which Mr. Bullard considers a key driver of his monetary policy calculus.

"The real rate going up on the order of 25, 30 basis points, we did take that on board and we think that's important," Mr. Bullard said. But he also added the exact timing of the rate rise he would like to see isn't critical.

Write to Michael S. Derby at michael.derby@wsj.com