Friday brought more hawkish Fed banter, with Jim Bullard (who, you’re reminded, dissented at the March meeting in favor of a 50bps hike) reiterating calls for more aggressive tightening.
In a statement posted to the St. Louis Fed’s website, Bullard called for the equivalent of 12 “standard” (if you will) rate hikes in 2022.
“The Committee is missing its [inflation] target by 410 basis points on the headline measure and 320 basis points on the core measure,” Bullard wrote, adding that “the burden of excessive inflation is particularly heavy for people with modest incomes and wealth and for those with limited ability to adjust to a rising cost of living.”
I repeatedly argued for the extension of accommodation for as long as it was feasible and/or realistic, but I dropped my support for that policy bent earlier this year once it became obvious the problem wasn’t going away.
What you see on the right-hand side in the figure (above) doesn’t count as price stability in a developed economy. It just doesn’t.
We can argue about wether the Fed has the proper tools to address the situation, but the debate about whether inflation is entrenched and, relatedly, whether everyone can safely ignore it, is settled. It is, and we can’t, respectively.
The CPI-adjusted shadow rate (which takes into account the impact of QE) was nearly -9% in November (figure above).
Next, Bullard addressed the question Jerome Powell dodged in the press conference. Recall that The Wall Street Journal‘s Nick Timiraos asked Powell if the Fed is concerned about higher inflation mechanically pushing real rates lower, offsetting efforts to tighten policy.
It was a good question, and a point I’ve revisited time and again in these pages over the past two weeks. The figure (below) shows where things stood at the height of the rally in raw materials earlier this month.
Powell didn’t have an answer for Timiraos, but Bullard does.
Although he didn’t address precisely that question, he spoke to the gist of it. “The combination of strong real economic performance and unexpectedly high inflation means that the Committee’s policy rate is currently far too low to prudently manage the US macroeconomic situation,” he wrote, noting that “US monetary policy has been unwittingly easing further because inflation has risen sharply while the policy rate has remained very low, pushing real interest rates lower.”
If the Committee doesn’t address that, Bullard warned, the Fed risks “losing credibility on its inflation target.” His prescription: The equivalent of a dozen 25bps hikes this year. To wit:
I recommended that the Committee try to achieve a level of the policy rate above 3% this year. This would quickly adjust the policy rate to a more appropriate level for the current circumstances. The Committee has successfully moved in this manner before. In 1994 and 1995, the Committee made a similar discrete adjustment to the policy rate to better align it with the macroeconomic circumstances at that time. The results were excellent. The Committee achieved 2% inflation on average and the US economy boomed during the second half of the 1990s. I think the Committee should try to achieve a similar outcome in the current environment.
Meanwhile, Christopher Waller, Bullard’s sidekick, told CNBC that the Fed may need to resort to multiple 50bps hikes. “I really favor front-loading our rate hikes,” he told Steve Liesman, noting that if policy acts on a lag, the Fed should get a faster start if it hopes to make a difference by the end of this year.
“In that sense, the way to front-load it is to pull some rate hikes forward, which would imply 50 basis points at one or multiple meetings in the near future,” Waller remarked.
12 hikes of 300 bps= low inflation accompanied by a depression…..
But his cherished models say it will work!
Do you really believe a 3% Fed funds rate would cause a depression — in the literal sense of the word “depression”? If so, can you back that up with any kind of data whatsoever? I mean, granted, moving that quickly in the post-Lehman era would be a shock, but if you really believe the world’s largest economy would fall into a 1930s-style depression due solely to a 3% Fed funds rate, then I suppose I’d suggest you sell every USD asset that you own, because this must be one truly terrible place to invest.
And it sounds like you may be reading it wrong. It’s not 12 hikes of 300bps. It’s 12 hikes to 300bps.
Seriously, Dr H. Is this the time to be experimenting with the lives of millions just because some model says to?
Keep the same course could also be construed as experimenting. The argument is this kind of hike was done before without terrible effects.
A bit of a straw man here eh? It isn’t no hikes or 12 in my mind. 12 hikes in 10 months is excessive. And I did not say a 30s depression either. The Fed does need to raise rates, just not hike too far or too fast
Is it ‘experimental’ to raise interest rates in the face of generational inflation?
By early may the fed will have raised rates 25 basis points and the balance sheet will be larger than when they dropped “transitory” from their language.
Yeah, see this is why I stopped supporting this policy bent. We’ve reached the point where the default position is zero rates and, at the very least, a balance sheet that’s a sizable chunk of GDP. That used to count as a lab experiment. Now, it’s standard, and anything tighter than that is considered an “experiment.”
It’s to the point now where we don’t seem to care at all about what the very same “everyday people” we’re trying to help actually say when you ask them. Survey after survey after survey all show the same thing: Americans aren’t worried (at all) about the jobs market. All they care about is inflation.
It doesn’t matter, though. I’ve given up on the idea that netizens want objectivity. They don’t. People go where they can get confirmation bias.
All I had to do was suggest the Fed should hike rates a few months ago and it was immediately met by condemnation from some readers. At the same time, simply reporting the actual inflation data as released by the government now makes me a traitor to the Progressive cause.
There’s one thing Democrats and Republicans in America have in common: They both want to be lied to.
But, just as I promised more than a half-decade ago when I started writing for public consumption, I’m not going to lie to people. I don’t care who’s president or which party controls Congress. If it ain’t workin’ out, it ain’t workin’ out.
Obviously, some of the GOP’s positions on social policy and voting rights are simply indefensible, but that’s an entirely separate discussion.
Thanks, H. Appreciate your frankness. I also feel it’s a little whacked when the default position is a rate of zero. A little more perspective to add…
Recalling the days of Volker and Greenspan, I’m of the view that such stability as we have enjoyed for decades, and the relative certainty of it, has been a massive luxury in comparison to the chilling realities of the cold war, the Vietnam war (in which about 59 thousand Americans were killed in action), and a very long-term effort to “control” inflation.
Needless to say, inflation is subject to an extremely wide scope of variables. I do not love the work of Ben Bernanke. But it seems quite a trick to have any hope of gaining even a subjective sense of “controlling” inflation. And Bernanke seems to have at least given us the illusion of possible control (or influence).
Greenspan was in charge when we used more traditional tools to wrestle with inflation. But at the time, the collapse of the iron curtain encouraged international political stability, the growth of democracies, and broad economic stability, which enabled the US to focus more on the home front, politically and financially. We abided more comfortably with limited international challenges, though we injected ourselves into protracted police actions in Iraq and Afghanistan. These were serious actions, but they were not “world” wars.
Putin’s actions today, coincident with rising inflation, threaten broader stability. Some suggest Putin will use the implicit nuclear threat implied through Russian belligerence to bluff his way into the Baltic states and impose his rule there. I hope not, and I don’t expect it (fingers crossed). But with a belligerent, unbalanced autocrat in the Kremlin making war, and a cold-war type of chill in the air, the prospect of ongoing inflation, while not linked directly, kind of reminds me of the old days.
For those of us who have seen first-hand the reality of inflation, one could argue its absence has an unreal quality. But now things are getting a little out of control. In the face of the war being made on Ukraine, I hope we can comfortably manage the wind down of QE. I feel we ought to have done sooner rather than in the face of actual, growing inflation and political instability in Europe. But most of all right now, while I would like to get along and make my investments, there is an international goon imposing himself on Europe, willfully and deliberately murdering women and children. I cannot abide. Nor should we as a country abide with this Russian monster in any way, shape, or form.
We’ll just have to wait to see how this war ends, and it may not be good. It may not even end. That sounds a little more like reality.
How will raising rates stifle inflation? By depressing demand. How is demand suppressed?
Let’s take housing for example. By raising rates and reducing credit liquidity for MBS (by liquidating the MBS portfolio), there will be fewer buyers and the buyers that are getting loans will be able to afford less home. Those that want to sell will have to reduce their listing price to meet those buyers which, when spread more broadly, will deflate the average home selling price. This deflation will disincentivize investors who want to use their cash to make a profit not jump into a sinking ship which further shrinks the market for homes. Smaller market, with lower average home sales will cool the housing boom and eventually those evaluating their options will consider renting a better option until rates come down and liquidity comes up.
The above applies to autos just as well as home improvement loans, debt consolidation loans, and student loans. Every market that has grown because of a near zero interest rate and high liquidity will shrink.
Higher interest rates when coupled with a bear market will incentive investors to save, opting for the better R/R in a CD than the potential 10%+ decline in stocks. That money in savings will not be spent, reducing dollar liquidity and driving prices of everything down as there will be less buyers, lower volumes, and lower demand for all goods and services.
While I believe this strategy has proven effective at curbing inflation in the past, I think it does very little to reduce the pain paycheck to paycheck families feel while they wait for inflation to abate. They often end up in a whole lot of debt while they try to make ends meet with high prices and high interest rates. This is a problem we really need to figure out how to solve societally, and it requires acknowledging that we classes of citizenry that require different levels of assistance in hard times. Instead of blaming these people for getting too far into debt we should consider applying some empathy to our compatriots. In the meantime we can all pretend the poor are just bad with money and that it is their own fault they can’t deal with record inflation without going bankrupt, getting addicted to drugs, and going to jail by illegally trying to fill the gap.
The hawks and the doves can both be “partly right”. Start the tightening big and fast [hawks] to send a clear signal that the Fed is not asleep and get some room for future maneuver, and ending early [doves] if the data (econ growth, employment, inflation) says to.
What I think is not “right” is to say that the data today requires soft-pedaling the start of tightening. Where is the weakness in employment or the easing of inflation? Growth is slowing, but everyone knew the +HSD% rebound growth of 2H21 would fade. Stocks are under pressure, but that’s a feature not a bug. Recession is increasingly in some forecasts, but forecasts are not data and the track record of forecasters (bearish and bullish) is patchy at best.
Any shock and awe comment related to any central bank icon has to be taken with a grain of salt, then placed into historical perspective and analyzed for accuracy.
Random crap:
“Fed chair is of course something I’d love to do,” Mr. Bullard told reporters after giving remarks in New York on Friday. “If I ever got that honor, I would certainly take it. I notice the phone has not been ringing off the hook to get that.”
Mr. Bullard’s comment comes in the midst of an attack by President Trump on his handpicked Fed chair, Jerome H. Powell. Mr. Trump has consistently said he is displeased with Mr. Powell and blames him for slowing the economy by raising interest rates in 2018. Mr. Powell has said he intends to serve out his four-year term as chair, which ends in early 2022.”
As reported on Federal reserve.gov, total US consumer credit was $4.2T in January, 2020 increasing to $4.5T in January, 2022. Given the once in a century disaster we are just now coming out of- the US consumer was quite financially responsible.
Time for the Fed to raise rates/lighten up the balance sheet to prepare for the next disaster. They did what was needed in a horrible situation- but it is time to get off the painkillers.
Gridlock in DC could be just what we need.
Look at the November and December credit data as well. It does not paint a rosy picture about potential buying power. Consumers may, indeed, be acting responsible by stepping away from running up their credit card balances even further to fund current expenditures. Or perhaps they already maxed out their cards?
This is a pointless discussion; we don’t really have any idea what the economy will be like in six months. It is apparent that Bullard has extremely limited influence on Fed decisions, which makes one wonder why he receives attention (here or elsewhere). The Fed doesn’t have the tools to deal with cost-push inflation (except by extreme demand destruction). We don’t know how the war in Europe will develop. We don’t know how covid will impact the economy (& society) in six months and this ignores other diseases (e.g. flu & ineffective flu shots). Real wages for workers are decreasing; will we have major strikes in six months? What about political instability in the US? Has climate change suddenly disappeared? What will be the impact of major hurricanes near Texas this summer and fall on inflation, especially on energy inflation? I guess people have to make predictions but they are largely worthless in my opinion. This reminds me of predictions of the strength of the Russian airforce, which Ukraine has shown to be illusory.
If anyone, including Fed members looks at the relationship between real GDP and effective Fed rates from 2008 up until today, they will see an extremely broken economy that hasn’t been stable or productive.
I’m not pointing fingers or denying the dynamics related to 15 years of anxiety ridden stressed out global economies, but the global conditions today are as bad as they’ve been and it’s entirely ludicrous for Bullard to play his hawk game and pretending it’s based on something real, other than his desire to jawbone and hyperventilate.
The Fed obviously should have tapered 8 months ago and done their job to take away the lsd laced punchbowl. Stimulus to support the economy in nonlinear shock was one thing, but the Fed screwed up by letting that party roll way too long, but making up for lost time and using shock and awe at this point is utterly asine.
Front loading tightening isn’t necessarily shock and awe. If the read through is delayed, front loading tightening may reduce the total amount of tightening that is ultimately necessary.
Everybody seems to think that the major reason for inflation is about money. Raise rates and it will go away. No it won’t. The problem here is the effect of a massive supply chain disruption, including an acute labor shortage. Ending mask mandates and pretending everything will be all right isn’t going to put an end to raging supply change issues. Industry globally has configured its supply chain linkages for maximum profits and much higher levels of risk if the chain is disrupted. Guess what, the chain has been severely disrupted. Higher rates won’t stop that. Neither will Powell or Biden. It has to to be attacked at the root and the root isn’t just money. It will take time for businesses to restock inputs, restructure transportation links, build new plants and distribution centers to increase efficiency without cutting out slack again. Firms are getting started but these things will take time.
As Zoltan pointed out, tightening (and reversing the wealth effect) has the effect of increasing the labor supply or at least staunching the bleeding. It can force the recently retired back into the work force and force a rethink for those about to retire.
That would certainly have an impact on the labor supply as the “missing” slack seems to be retirees
On behalf of myself and 10,553 other subscribers, I would like to thank H and all of the commenters who have spoken their minds, for confirming our biases today.
An additional relevant thought from Jeffery Snider that’s spot-on:
” Insofar as any “inflation” fighting technique might be concerned, just how are consistent increases to IOER, the RRP rate, like the federal funds range going to extract more oil from the ground, or assemble automobiles with or without semiconductor chips?”
As if those are the only factors that are impacting Americans. House prices have been and continue to be a bane for my generation (millennials). It enrages me to see the percentage of single family houses that are bought by investors only to have Americans effectively pay the mortgage and then some to those same investors. Meanwhile renters are told they don’t qualify for a mortgage despite continuously paying one.
At the end of the day this is simple. Everyone knows what the medicine is, no one wants to take it.
Except the millions of Americans that are crying out about inflation who don’t have any wealth to be wound down.