“Our credibility is on the line here,” an unapologetic Jim Bullard said Monday, reiterating concerns about the glaring juxtaposition between the Fed’s policy stance and the incoming inflation data.
Bullard contributed to a fireworks show last week when, during remarks to Bloomberg, he advocated for aggressive front-loading of rate hikes, going so far as to suggest an emergency, inter-meeting 25bps hike wouldn’t be the worst idea he’d ever heard considering the broadening out of price pressures.
Commenting during a closely-watched interview with CNBC’s Steve Liesman, Bullard didn’t back down. “This is a lot of inflation,” he said. “We do have to react to the data.”
That spoke (loudly) to points I’ve made in these pages at various intervals over the past several years regarding data-dependence. In short, it’s easy to espouse a steadfast commitment to the data when the data is always cooperating.
Market participants are (very) familiar with the so-called “good news is bad news” dynamic, wherein incrementally positive economic figures are viewed unfavorably by risk assets due to the assumed read-through for monetary policy during periods when policymakers were seen as predisposed to dialing back accommodation. But never in the post-financial crisis era have investors been compelled to reckon with a meaningful, sustained inflation overshoot in advanced economies. As Bullard alluded to Monday, data dependence now demands aggressive action. The figure (below), is madness.
In a testament to just how accustomed policymakers and markets are to a benign macro regime that always offered some excuse for a dovish tilt, Bullard’s colleagues (and countless market participants) are engaged in an increasingly ridiculous effort to convince themselves that black is white and up is down. According to that line of thinking, data dependence actually requires more patience because… well, because the data we have in hand isn’t agreeable anymore.
The concept of data dependence has thus been completely bastardized. The Fed is data dependent as long as the data is amenable to dovish spin. When it stopped being amenable, policymakers claimed it was an aberration — inflation was “transitory,” and besides, didn’t we want a little inflation? When “transitory” reached its sell-by date, and when a little inflation turned into Bullard’s “a lot” of inflation, policymakers stopped using the “dirty word” (as Raphael Bostic called it), but they retained the same policy bent.
They (policymakers) would insist that isn’t true. After all, they sped up the taper and spent the last four weeks socializing the message vis-à-vis the likelihood of liftoff in March. But that doesn’t change the fact that when this chapter in the history of central banking is written, it will tell of a Fed that kept rates at zero and continued to purchase tens of billions in assets for months, while inflation raged and despite no compelling evidence to suggest it was poised to abate materially anytime soon.
For her part, Mary Daly told CBS on Sunday that if history is any guide, “abrupt and aggressive action can actually have a destabilizing effect on the very growth and price stability we’re trying to achieve.”
That’s doubtlessly true. What Daly didn’t mention, though, is that the Fed wouldn’t be compelled to push back on demands for “abrupt and aggressive action” had they acted sooner.
Water under the bridge, I know. Hindsight is 20/20. But do note that Daly’s logic simply doesn’t work. It’s an exercise in question-begging at this point. Like identifying a small tumor, putting off surgery for two years, then, when it’s the size of a tennis ball, pointing out that removing a tumor that large could be a shock to the body. Almost everyone will forgive you for waiting around in the hope it would stop growing. No one will suggest you keep waiting.
Make no mistake, if the Fed is wrong about this, and inflation either i) doesn’t abate to any appreciable degree, or even ii) loiters at, say, twice the Fed’s target for a year or more, this is going to go down as one of the most embarrassing policy boondoggles in history.
Bullard, at least, understands that. “People are unhappy, consumer confidence is declining,” he told Liesman. “This is not a good situation.”
Read more: Jerome Powell’s Inaction Risks Irreparable Damage To Fed
Non-voting member Bullard appears to be angling to be appointed Chairman or Treasury Secretary in the next Trump or DeSantis administration.
I thought he was a voting member?
Bullard is a voter.
Ah, I stand corrected.
But his record caused me to start calling him Mr. Weathervane years ago.
Of course, we all agree that jacking up interest rates will bring down food prices.
One has to imagine in future Behavioral Economics textbooks Powell will figure prominently in the chapter, “Global Professional Groupthink and Herding Behavior in the Economics Field”. This chapter will probably be about how the painfully obvious and easily anticipated bout of inflation, following a Global Pandemic in a JIT global supply chain at the top of a high anxiety TINA market where every municipality enacted their own policies from a random selection of science and social-media misinformed pressure campaigns, was overlooked as the most probable outcome. The genesis of the political/cultural social-media phenomena will be covered in the preceding chapter starring Alan Greenspan. The textbook will dutifully point out how the other OECD economists were just as complicit, and how, amazingly, all managed to wake with the same dimwitted surprised look simultaneously in the course of a 1.537 global news cycle period. Of course, the EM banks boosting their IRs for months in advance to the ‘Great Awakening’ will be lucky to make it into a footnote, never mind a sidebar.
A little further on in the bright future that stretches out to infinity before Humanity there will probably be at least one Economics Behavioral Psychology Fusion textbook analysis of Bullard’s shout out his tribal chief, a living anachronism still capable of writing Letters of Recommendation, “these are numbers Alan Greenspan never saw”. Still making excuses for each other at the very apex no less.
Where was this much vaunted ‘data dependency’ when the FED was shoveling coal like berserk coolies on meth into the furnaces powering the “ship of state” back in 2021? Where is Bullard saying, “our credibility is on the line here and we do have to react to data”, in 2020? Did any members of these Star Chambers actually read the books about past pandemics they assigned to their minions in 2020? Leadership by bullet points…
https://www.bloomberg.com/news/articles/2022-02-14/bullard-urges-front-loading-hikes-to-ensure-inflation-crediblity
Guess I’ll read the article “Only [Lord] Jim Can Save Us …” now. Wouldn’t want to contaminate the purity of my righteous indignation before spewing my general impression of events surrounding the FED this past week…. Read and Done. Seems my pre-read sarcastic rant/vent, basically my reaction to the posted link and the general silliness on other media feeds for the past seven or so days, is responding on/to (or both?) the same frequencies as @H-man…. kcuF-me! Am I Groupthink-ing now? Sigh.
@Derek – I finally thought of how higher interest rates will help drive down food prices! When the engineer a recession, it may reduce demand for energy, which is a major cost for larger-scale ag operations. That said, Mr. Weathervane cannot control the weather using interest rates.
Bullard’s comments were irresponsible, and he should not be the President of his regional bank. He is a prime example of why the selection of regional bank presidents need to be reformed (the others being lack of diversity and insider trading). The job of a Fed policymaker should not be to douse a fire with gasoline.
It’s irresponsible to tell the truth now, apparently. The people can’t handle the truth. Of course, it’s staring right at them on the grocery shelves, so you’re right — maybe Bullard shouldn’t say it. After all, the milk is screaming it and so is the gas and the ham and the cereal.
So is yelling fire in a crowded theatre. Bullard is part of a policymaking team on a Board, not an analyst on the sidelines. Policymakers are not supposed to inflame markets. He is supposed to make monetary policy as part of a team, not make soundbites. I don’t happen to agree with Bullard, but that is not the point. Nor whether or not he is correct. He is currently acting as a destructive force.
Does the same go for all the other Fed speakers? The ones who agree with you on inflation, I mean. Should they be quiet too? Or is it just Fed speakers who say things that might cause an adverse reaction who shouldn’t talk? I’m just wondering, because as you’re surely aware, Bullard historically inflames markets up. Is that bad too? Or only when the inflaming means they go down?
Generally there is too much talk at the Fed. The pendulum swung too far the other way after Greenspan, who kept a lid on discussion and ruled the Board with an iron fist. I think the dot plot needs to go for instance- it is misleading at best and at worst runs cross purpose to the deliberations and communication strategy. It is fine for officials at the Fed to voice opinions as long as they don’t inflame the markets either way. Bullard is a loose cannon and not helpful. I have not seen other governors inflame the markets but if they did- either way that is not a good way to communicate. I have seen other governors say they want to tighten more quickly than Powell without inflaming the market the way Bullard did. His timing was terrible and disruptive.
Is it a problem to tell fire in a crowded theatre if the theatre is on fire?
Scenario: Fatmoose is attending a Silent Film revival for the local chapter of the hearing impaired. These facts, other than Fatmoose is in the building YO!, are openly displayed on multiple banners on the exterior and interior of the building hosting the Silent Film revival. While inside, sitting behind the other patrons towards the rear, Fatmoose hears the crackling of flames spreading across the high ceiling in the rear above the unoccupied balcony seats. Fatmoose stands and screams “Fire” and then immediately runs out of the theater unwittingly bowling over the usher in the darkness. Fatmoose’s attempt to warn the hearing impaired theatre goers was witnessed by the sole surviving usher (a deaf mute) before the stampeding fat moose temporarily knocked her unconscious.
Question before the Supreme Court: Is Fatmoose partially responsible for the terrible tragedy that cost the lives of the local chapter of the hearing impaired because he failed to ‘yell’ fire in American Sign Language?
So many questions. So little time for answers.
The theatre is not on fire at least not yet, and the fire department is getting out the hoses now just in case since they are seeing some smoke.
My two cents of personal opinion about Bullard upsetting markets – it doesn’t bother me.
Equities broadly writ are overvalued on most likely scenarios, it would be reasonable and even salutary for the market to bear down. It’s up to investors to position themselves appropriately, some will get to play another day and some won’t.
No-one ever promised us a rose garden.
I would prefer a decline near term that resets prices to levels from which money can be made in the coming years, than many lost years of low/no returns. Of course, I would also prefer to personally still be in the game at the bottom, but eventually we all lose the game of musical chairs.
I do not want the “real economy” to get unduly hurt, but I think equity investors overstate the importance of our game to Main Street. We’re told that the GFC produced a generation of burned and cautious investors. Better that than the generation that followed, in my view.
Hungry Worm finds your words palatable and easily digestible. As I’m pretty much just an organic bio-reactor for the production and application of fertilizer where it can do the most good in real-time I see my contributions as purely additive to the general weal. I too was not promised a rose garden. They just put me there without asking, thank you very much. It was just weeds when I arrived. But as the ‘wheal’ of Fortuna turned and the Market Bear god beared-down I took what rolled downhill and turned that weed patch into a bountiful rose garden. I’m not looking for kudos or a line of credit. I’m a humble worm. It is just what we do.
That said, in the additive spirit, I’d just value add my 1 cent and point out the GFC debacle was the work of ‘adults.’ The children were the innocent victims for the most part. Today’s multiple equity/asset bubbles popping up over the past two years are the combined effort of ‘adults’ and their cherubs. Primate young and distracted adults say and do the funniest things I’ve gathered from the vibrations I’m tuned into. Even the humblest hungry worm could of told those willing to listen no good would come from any App with Robin in it’s name! But can we ‘bottom-feeders’ really expect our modus operandi to work yet again? So soon after the last Compost of the Vanities smorgasbord?!? IDK, but, see you at bottom, where all the mighty (tasty) things fall to those with the necessary patience … eventually.
FWIW, I’d be okay with tapering right now. I’m a bit more suspicious of a 50 bps hike in March but not entirely against it, if it was well telegraphed.
OTOH, I still think the lack of consumer confidence/spending and growth going forward has to have a sobering effect on supply chains and inflation… or else my economics needs serious updating.
Maybe. But k shaped inflation means that most of the things being bought are necessities for many… even if they stop buying charities and the government will have to fill the gap.
Couldn’t agree with everything you wrote in this post more.
When things are so uncertain, it is time for the infamous 2×2 matrix. In 2H22:
Top left: inflation stays high + economic recession (e.g. Fed tools ineffective against recession but Fed can’t admit it and tightens until economy tips over)
Top right: inflation stays high + economic growth (e.g. Fed ineffective but backs off before killing the wrong bird with its stone)
Bottom left: inflation lower + economic recession (e.g. inflation was mostly transitory after all, so Fed bullets went through the wall and hit the economy)
Bottom right: inflation low + economic growth (e.g. everyone owes Powell heaps of apologies j/k)
In each quadrant, how do you want to be positioned – what asset classes, geos, sectors, styles?
The reason I’m asking, is that it feels too risky to position portfolios now for one expected outcome, the uncertainties are high. Even if you knew exactly what Fed will do in 1H, the flow-through may be surprising. In coming months, however, the picture should (?) get clearer. Then it will be helpful to have actions mapped out in advance.
When information is short and uncertainty is high there are two strategies. First, one must set a temporary plan and a contingency plan for each probable outcome. Second, one needs to seek information that will reduce uncertainty. This is why most industries hire economists, lobbyists, and smooth operators and house them in Washington.
People are unhappy and consumer confidence is declining, Bullard is 100% correct about that. Will that change if the Fed hikes before March? Will a 50 pbs hike in March make a dent in inflation or restore Fed credibility? Will it help consumer confidence in any way? Market participants may make a connection between the increasing price of milk and Fed policy but I doubt the vast majority of consumers can, at this point we may as well rely on hope and prayers for inflation to subside. Fed policy can still lead to demand destruction but a soft landing is a pipe dream, the only way the Fed can tame inflation now is by engineering a recession, folks will remain unhappy and consumers will lack confidence regardless of which path the Fed takes, it all ends in pain.
Don’t disagree that demand destruction is required to put the inflation genie back in the bottle. The question is: A little pain or a lot? I would count “a little” as victory for the Fed and the American people. To achieve it, though, they need to pick up the pace and start moving.
Imho Bullard is self serving and disingenuous and has no business being on the FOMC…