Federal Reserve policymakers are nothing if not stubborn. Why admit to a mistake if you can just double down on it and later say, oops, I’m sorry—who knew?
Everyone knows by now that inflation is not transitory. Fed Chairman, Jerome Powell, used to brag that the central bank has the tools it needs to fight inflation, but for reasons known only to the wise heads on the Federal Open Market Committee, they are slow to use them.
Rate Hikes: Front Loaded Or Slow And Steady?
New York Fed President John Williams was among those trying to tamp down market expectations of a rate hike bigger than a quarter point in the committee’s mid-March meeting.
"Personally, I don’t see any compelling argument to take a big step at the beginning," Williams, who is vice chairman of the FOMC and a permanent voting member, said last week at a New Jersey City University event. One wonders what he would consider compelling if 7.5% inflation isn’t.
For Williams, the former chief economist at the San Francisco Fed when Treasury Secretary Janet Yellen was head of the regional bank, it’s enough if the Fed is seen to be "steadily moving" on a path of rate increases.
Fed Governor Lael Brainard, another notable dove on the FOMC, chimed in with her belief that the Fed will "initiate a series of rate increases" starting in March.
The minutes of the January FOMC meeting, released last week, showed that many of the policymakers were still worried about choking off the economy if they took the drastic measure of raising interest rates too quickly—like, say, a half-point in March.
Stock market investors breathed a collective sigh of relief, interpreting this to mean the rate hike in March would be just a quarter-point—which the remarks from Williams and Brainard certainly seemed to support.
St. Louis Fed President James Bullard also doubled down, however, warning last week during a panel discussion at Columbia University that action on rates needs to be more drastic and much quicker, as he called for the Fed to "front-load" rate hikes to dampen inflation. CNBC relayed his remarks:
“We’re at more risk now than we’ve been in a generation that this could get out of control. One scenario would be...a new surprise that hits us that we can’t anticipate right now, but we would have even more inflation. That’s the kind of situation that we want to...make sure it doesn’t occur.”
Former PIMCO CEO Mohamed El-Erian, who is now chief economic adviser for PIMCO parent Allianz, also doubled down, worrying in a Yahoo Finance Live appearance that the Fed was acting too late.
"The concern we have is by being late, the Fed also puts economic growth in play. And that means earnings become more uncertain. So that's why this is a very delicate period. There is still a window to get this right. But unfortunately, that window is closing."
He focused on the Fed’s planned quantitative tightening—when it starts to run off its bond portfolio by not reinvesting proceeds from maturing bonds. This need not be disruptive, he said, but the Fed continuing to buy new bonds this month and maintaining its bloated balance sheet for several more months could make the impact that much harder.
The US producer price index for January last week showed a 9.7% increase on the year, much higher than the 9.1% expected by economists. This wholesale price index generally feeds into retail prices, which doesn’t bode well for inflation data in the coming weeks.
The personal consumption expenditures index, widely viewed as one of the main data points for Fed policymakers, is now expected to show a 5.2% increase on the year for January when it is released at the end of this week, even when volatile food and energy costs are excluded. The consumer price index, which gets the headlines most familiar to consumers (and investors), will have the reading for February on Mar. 10, ahead of the FOMC meeting the following week.
Fed Board Nominee Drama Continues
There was also some drama last week regarding President Joe Biden’s nominations to posts on the Fed’s board of governors. Republicans boycotted the Senate Banking Committee vote on the five nominees after the chairman, Ohio’s Sherrod Brown, insisted on a vote on the entire slate at once. The boycott effectively blocked committee action—at least one Republican has to be present to make a quorum—and delayed all the nominations.
The Republican lawmakers, led by Pennsylvania’s Pat Toomey, have objected to the appointment of Sarah Bloom Raskin as vice chair of regulation after her past remarks on forcing banks to deny capital to fossil fuel companies. They also found fault in her explanations about intervening to get a coveted master account at the Fed for a fintech firm where she sat on the board. (It was the only nonbank fintech to get such an account.)
Officials at the Kansas City Fed, which reversed its initial rejection of the application after a phone call from Raskin to the bank’s president, Esther George, deny Raskin’s intervention played a role in their decision. It is perhaps a measure of the Fed’s loss of credibility after waffling on stock trades by policymakers that this denial has met with skepticism.