The world is waiting with bated breath for the Federal Reserve policy meeting this week as investors remain alarmed about inflation not only in the US but around the globe.
The Federal Open Market Committee is not only expected to confirm it will finish tapering its bond purchases by March, but to also indicate whether a rate hike is imminent and whether the Fed will be running off its bond portfolio soon.
Dearth Of Meaningful Policy Guidance
Economists are now predicting that the Fed will signal its intention to start raising rates at this January meeting and proceed on that course in the Mar. 15-16 meeting.
Goldman Sachs’ economists are now predicting at least four rate hikes, but acknowledge there are upside risks and there could be hikes at every policy meeting until the FOMC sees some impact. The US central bank may announce a runoff of the bond portfolio in July, but could also pull that ahead to May.
Catherine Mann, an external member of the Monetary Policy Committee at the Bank of England, warned in a presentation Friday that inflation is hitting parts of the economy previously considered stable.
“Much inflation commentary over the last year has explained high current rates by pointing out a few very volatile components such as fuel or automobiles while arguing that 'underlying inflation' was still benign. While this may have been true initially, going into 2022, this story no longer holds up.”
The MPC will hold its first meeting of 2022 next week and Mann, a former chief economist at Citibank and the OECD, implied that she would be voting for another rate hike then as she urged quick action to forestall more severe measures.
“In my view, the objective for monetary policy now should be to lean against this 'strong-for-longer' scenario,” she said.
Robert Heller, a former member of the Fed board of governors, said that Milton Friedman must be turning in his grave as Fed policymakers have abandoned their targeting of low inflation and allowed the M2 money supply to grow from $15 trillion to $21 trillion in 2020-21 as it mopped up much of the new government debt to counter the COVID-19 pandemic.
In a commentary published in Barron’s, Heller took particular exception to the Fed’s continuing purchase of mortgage obligations. Indeed, he asked rhetorically:
“How does it make sense to buy these instruments, while housing prices are exploding at an annual clip of nearly 20%?”
One casualty for Fed policymakers may be how much forward guidance they can offer. This has been a feature of Fed policy since the financial crisis ushered in a long period of low inflation and low interest rates. With anywhere from three to seven quarter-point hikes on tap for this year, it will be difficult to provide meaningful guidance.
Fed Nominee Priorities Challenged
Meanwhile, the latest nominations to the Fed board are facing some headwinds—not least because the nominees seem less focused on maintaining stable prices than taking on new things for the Fed to manage.
The conservative editorial board at The Wall Street Journal criticized the nominee for vice chairman for regulation, Sarah Bloom Raskin, for her views on steering investments on energy “that could undermine financial stability by punishing some industries while favoring others.”
In an editorial, the Journal said Raskin’s views “should trouble senators who care about the Fed’s independence.” Democratic senators like West Virginia’s Joe Manchin and Montana’s Jon Tester should be especially worried since their states depend on fossil fuel investment.
Conservative critics have also faulted Michigan State University economist Lisa Cook for a lack of research on monetary economics, which may become a stumbling block to her confirmation.
The surge in inflation and growing concern about it make it bad timing for nominees with other priorities, especially as the administration has lost considerable momentum to effect political change.