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An update on the latest FOMC participants’ statements on inflation and possible path for monetary policy.
In the last few days, we have heard from three participants: Daly, Williams, and Waller (on top of Powell during Q&As).
What to keep in mind
All participants who have spoken recently sounded hakwish, including the traditionally dovish Daly who said that “the US economy may need 2 or 3 hikes in 2022” and Williams who said that “raising rates would be a positive event for the US economy”.
Notably, Fed Governor Waller for the first time started talking about quantitative tightening saying that “balance-sheet runoff by summer would also help remove accommodation, reducing the need for additional rate hikes.”
This cycle is different in several ways but one in particular: the speed (and magnitude) of the contraction and the following rebound has been much higher than in previous cycles. For this reason, we do not expect the Fed to wait as much as it did last cycle between the first rate hike and the beginning of quantative tightening. The data will be crucial but under the assumption that inflation will continue to run well above target in the second half of 2022, the reduction of the balance sheet might start within the end of next year.
FOMC-meter
Dovish
Jerome H. Powell
Leal Brainard
Charles Evans
John Williams
Mary C. Daly
Neel Kashkari
Neutral
Richard H. Clarida
MIchelle W. Bowman
Thomas I. Barkin
Loretta J. Mester
Hawkish
Christopher Waller
Randal K. Quarles
Raphael Bostic
James Bullard
Patrick T. Harker
Esther L. George
Note: 2021 FOMC voters are bolded.
Recent FOMC participants' statements
Jerome H. Powell – Chair – Dovish
Dec 16 – Fed Powell says there’s a serious risk that inflation may become more persistent. Bottlenecks and supply constraints have been greater and longer-lasting than anticipated. Inflation will continue to rise beyond our 2% target well into the following year. Price increases are now broader. By the end of 2022 I expect inflation to be closer to 2%”. He added that “The inflation we’ve seen is not at all what we were looking for in our framework. […] This inflation has nothing to do with tightness in the labor market. […] With inflation so much above target, we can’t afford to wait too long to reach full employment. […] There’s a serious risk that inflation may become more persistent. The likelihood of higher inflation becoming entrenched has grown.” […] “We cannot act as if we knew that it will be lower in 2022.”
Dec 1 – Fed Powell Opens The Door To Faster Tapering. “It is acceptable that we examine speeding up the taper at the next meeting in order to finish it sooner.” he said. “We expect inflation to fall significantly in the second half of next year. […] I think it is very likely inflation will come down then.”. However, he added that “The point is, we can’t act as if we’re sure of that.” He also added that “Demand is very, very robust as a result of the fiscal stimulus and the economy’s rapid recovery. The economy is very strong now. The risks of higher inflation have increased.”. Finally, he said “We need to move away from the term transitory”.
Richard H. Clarida – Vice Chair – Neutral
Nov 30 – Clarida Says Getting inflation down close to 2% key to managing expectations. “Getting actual inflation down close to 2% will be important part of keeping inflation expectations anchored” Clarida said. He also added that “The fact that inflation expectations have risen from last year’s low levels is not cause for concern.”.
Randal K. Quarles – Vice Chair – Hawkish
Dec 2 – Quarles Says Fed Will Need to Raise Rates to Cool Inflation. “This is not a question of demand at pre-Covid levels and supply taking a while to reach back up to that pre-Covid capacity. But rather we have sustained higher demand,” he said during a webinar hosted by the American Enterprise Institute. “This is…not really a bottleneck story anymore,” he said. The Fed needs to bring supply and demand into balance by raising interest rates to cool off the economy until businesses create more productive capacity to meet higher levels of demand, Mr. Quarles said. “Therefore, we should respond more quickly to constrain that demand,” he said. Mr. Quarles said he was “certainly supportive” of a faster tapering.
Lael Brainard – Governor – Dovish
Sep 27 – Fed’s Brainard says currently elevated level of inflation is driven by COVID-related disruptions. In a prepared speech, Brainard said she expects inflation to decelerate, and pre-COVID inflation dynamics to return when COVID disruptions dissipate. She also added that “with Delta disrupting the rotation from goods to services and prolonging supply bottlenecks, it is uncertain just how fast and how much inflation will decelerate over the remainder of the year and into next year”. As for inflation expectations, Brainard said that “I am vigilant for any signs that the current high level of inflation might push longer-term inflation expectations above levels consistent with our 2 percent inflation objective. Market-based measures of inflation compensation suggest inflation expectations remain well anchored. For instance, the five-year, five-year-forward CPI inflation compensation measure based on Treasury Inflation-Protected Securities has remained range bound around 2.2 percent since declining about 0.2 percentage point in June—consistent with the FOMC’s 2 percent objective for PCE inflation.” Finaly, she concluded that “There are good reasons to expect a return to pre-COVID inflation dynamics due to the underlying structural features of a relatively flat Phillips curve, low equilibrium interest rates, and low underlying trend inflation. While the playbook for guiding inflation back down to target following a moderate overshoot is well tested and effective, experience suggests it is difficult to guide inflation up to target from below.”.
Christopher J. Waller – Governor – Hawkish
Dec 17 – Interest rate hike needed ‘shortly’ after March end to asset purchases, Fed’s Waller says. In a long speech, Waller said that inflation is “alarmingly high, persistent, and has broadened to affect more categories of goods and services, compared with earlier this year. Wages are rising, and business contacts are reporting in the Fed’s Beige Book that they are comfortable passing on increases in input costs to their customers.”. He added that “given my expectations for inflation and labor market conditions, I believe an increase in the target range for the federal funds rate will be warranted shortly after our asset purchases end.”. Also “One of the Federal Reserve’s most important responsibilities is keeping prices stable and inflation under control. […] “I have been surprised at the persistence of the bottlenecks and other supply disruptions that have been a prominent source of elevated inflation. Like others, I expected that markets would adjust quickly and that these problems would be fixed, but that clearly isn’t happening, and at this point, with COVID continuing to crimp supply, I don’t know when it will. […] “the next few months will be crucial in determining whether price increases will begin to moderate, as I still expect in my baseline outlook. However, I will be closely watching indicators of inflation expectations for signs that consumers and investors have come to expect high inflation well into the future, a development that could signal that the moderation in inflation I expect will not be coming soon.” Finally, he expressed his preference towards quantitive tightening: “Balance-sheet runoff by summer would also help remove accommodation, reducing the need for additional rate hikes. We can go faster on balance sheet given flow of the overnight reverse repo operation facility.“
Michelle W. Bowman – Governor – Neutral
Nov 5 – Fed Board Bowman sees housing inflation adding pressure to overall price inflation. “There are signs of underlying supply and demand imbalances that will contribute to increases in housing costs and inflation” she said adding that “I anticipate that these housing supply issues are unlikely to reverse materially in the short term, which suggests that we are likely to see higher inflation from housing for a while.”
Thomas I. Barkin – Richmond Fed President – Neutral
Dec 2 – Fed Barkin Says He Supports the Fed Efforts to Normalise Monetary Policy. “Immunizations, and fiscal support have caused inflation to rise quicker than projected.” he said. “The Fed’s forward guidance may not be as simple to understand as it was when the central bank was approaching inflation from a low of less than 2%. I’m as comfortable with the new framework as i was 18 months ago.”
Raphael Bostic – Atlanta Fed President – Hawkish
Dec 2 – Fed Bostic Says Inflation Might Remain Higher Than Anticipated. “If necessary, the Fed needs to be able to raise interest rates sooner.” he said. “There are reasons to believe that supply chain changes during a pandemic will result in slightly higher inflation than previously predicted.”. “The data will guide our taper decision”. “Tapering will allow greater flexibility on interest rate lift-off in 2022.”. “It would be appropriate to attempt to reduce the size of the Fed balance sheet”. “It is ideal for the Fed to taper before rising rates”. “I believe that reducing the bond programme by the end of the first quarter of 2022 is in our best interests.”. “My interest rate path is to be gradual and stable, with a goal of reaching a neutral rate in late 2024 or early 2025.”
Mary C. Daly – San Francisco Fed President – Dovish
Dec 17 – Fed’s Daly: may need 2 or 3 interest rate hikes in 2022. “I have adjusted my stance,” Daly said in an interview with the Wall Street Journal, noting the burden that rising prices could put on families and nodding to the difficulty firms are having hiring workers and the health fears that are keeping many from seeking jobs. “If we try to push the labor market now when clearly many Americans who are sidelined don’t want to come in … if we push too hard, and then we have to raise rates rapidly, then we end up with a really sharp pullback and historically a very sharp pullback on the part of the Fed, it results in a recession,” she said in the interview. “If we see that the economy is delivering high inflation, even if we expect that inflation to not persist past the pandemic, and we see the labor market is extremely tight, even though we don’t expect that to be true past the pandemic, then the policy action that would be appropriate is, after tapering, to raise the interest rate.”
Dec 2 – Fed’s ‘dot-plot’ likely to show more than one interest rate hike in 2022, Daly says. Talking about expectations Daly said that: “Long-run inflation expectations have been remarkably stable, giving me confidence that people believe the fed is still credible.”
Charles L. Evans – Chicago Fed President – Dovish
Nov 18 – Fed’s Evans says may need 2022 rate hike. Chicago Federal Reserve President Charles Evans, one of the U.S. central bank’s most reliable policy doves, said he is “open-minded” to adjustments in monetary policy next year, if inflation continues to stay high. That’s not, he said, his expectation, given his view that price pressures will ease next year as supply chains get repaired and consumer demand now concentrated on goods shifts to services in what would be a return to a more normal economic balance. “It might be a gentle increase; it could begin next year after we finish our asset purchasing program, or it could be as long as into 2023; it will depend on the data that we see and the state of inflationary pressures”. Evans said.
John C. Williams – New York Fed President – Dovish
James Bullard – St. Louis Fed President – Hawkish
Nov 16 – Fed’s Bullard says Fed should tack “hawkish” in next couple of meetings. “If inflation happens to go away we are in great shape for that. If inflation doesn’t go away as quickly as many are currently anticipating it is going to be up to the (Federal Open Market Committee) to keep inflation under control,” Bullard said. Inflation at the current levels “does not have the reputation of moving down very easily,” Mr. Bullard said. “I think it behooves the [Federal Open Market Committee] to tack in a more hawkish direction in the next couple of meetings so that we’re managing the risk of inflation appropriately.” Bullard said the FOMC could speed up the taper if appropriate, which would allow the Committee to assess the data a bit earlier and decide what to do on the policy rate. He discussed other considerations for policy if needed, including playing up the idea that raising the policy rate wouldn’t have to wait until the end of the taper, and allowing runoff of the balance sheet at the end of the taper instead of waiting on that decision for a while.
Esther L. George – Kansas City Fed President – Hawkish
Nov 5 – Fed George says monetary policy should not over-react. In a prepared speech, George said: “First, monetary policy should look through temporary increases in inflation.” […] “Given the frequency of temporary shocks to energy and commodity price inflation that are often attributed to supply, core inflation is likely to offer a better measure of underlying or trend inflation and thus is thought to provide an important guide to monetary policy.” […] “Monetary policy should not respond aggressively to increases in inflation resulting from a shift in relative prices” […] “Theory suggests it is better for policymakers to accept this increase in inflation, which should be temporary, than to tighten policy and restrict overall activity in an effort to force offsetting price declines in shrinking sectors.”
Patrick T. Harker – Philadelphia Fed President – Hawkish
Nov 8 – Fed’s Harker says inflation is more widespread across products and services than it was earlier this year. ” In the third quarter, nearly three-quarters of spending on goods and services in the CPI “basket” was on goods that displayed annualized inflation of more than 4 percent; in the second quarter, tht was true for only a little more than a third of the goods and services that comprise the basket” he said. He also added that “we are monitoring inflation very closely and are prepared to take action, should circumstances warrant it”.
Neel Kashkari – Minneapolis – Dovish
Nov 15 – Fed’s Kashkari expects higher inflation continuing over next few months. Minneapolis Federal Reserve Bank President Neel Kashkari said on Sunday he expects higher inflation continuing over the next few months but warned that the U.S. central bank should not overreact to elevated inflation as it is likely to be temporary.
Loretta J. Mester – Cleveland Fed President – Neutral
Dec 2 – Fed’s Mester says Omicron threatens to stoke U.S. inflation. “If it turns out to be a bad variant it could exacerbate the upward price pressures we’ve seen from the supply-chain problems,” Mester told. “We have to entertain the risk that those persistently high numbers of inflation could become more embedded,” Mester said. “It’s really about giving us the optionality . . . to make moves on the interest rate path.” Mester added that said she would support at least one rate increase next year, and that two might be “appropriate”.
Dec 1 – Fed Mester Says she supports concluding Fed taper in 1q or early 2q. “We should be able to raise rates a couple of times in 2022 if necessary”. “A speedier taper gives the fed the ability to hike if necessary”.