FOMC will do whatever it takes to bring down inflation.
And believe them, it will be enough.
An update on the latest FOMC participants’ statements on inflation and possible path for monetary policy.
In the last two days, we have heard from 7 participants: Brainard, Bullard, Mester, Barkin, Daly, Evans, and Harker.
What to keep in mind
Every participant is very concerned about high inflation and determined to set monetary policy accordingly. The list includes participants traditionally seen as “doves”, such as Vice Chair Brainard who now expects “many rates increases in 2022”. The speed and number of hikes will be determined by the behavior of inflation (and long-term expectations); labor market data will be relevant but the focus has shifted (please note that some participants (Bullard, Barkin) have essentially thrown the towel on participation).
Reminder: because of the rotation, the hawks have now the (voting) majority at the table. Out of 9 voters, 5 (Waller, Bullard, George, Mester and Harker) have expressed clear hawkish views and a preference for hiking as early as March. Powell’s opinion is, of course, the most important one and it is difficult to imagine the hawks voting against the Chair. But the FOMC table has turned and the hawks are now in control.
Comment
It is hard to imagine the FOMC delaying hiking, even if labor data will be soft in the next couple of months. At this point, we think the probability of liftoff in March is above 90% (any impact on the labor market by Omicron will, in our view, be heavily discounted). As previously reported, the Fed staff (2021) Taylor rule implies 4 hikes in 2022, conditional on the unemployment rate at or below 4 percent in 2021:Q1. We expect the FOMC to hike at least 4 times this year, as we continue to expect the Fed staff (and partially the FOMC) to be surprised by the incoming data on the upside.
The good news is that the FOMC has now recognised the reality. They will act accordingly. Historically, it has been enough.
FOMC-meter
Dovish
Leal Brainard
John Williams
Charles Evans
Mary C. Daly
Neel Kashkari
Neutral
Jerome H. Powell
Michelle W. Bowman
Thomas I. Barkin
Hawkish
Christopher Waller
James Bullard
Esther L. George
Loretta J. Mester
Raphael Bostic
Patrick T. Harker
Note: 2022 FOMC voters are bolded.
Recent FOMC participants' statements - most recent statements in blue
Jerome H. Powell – Chair – Dovish
Jan 11 – Fed Powell does not rule out hiking in March. “At the moment, we need to pay more attention to inflation than to the maximum employment goal. If inflation persists for a longer period of time, it is more likely to become entrenched, and our policy will adjust accordingly. […] Much of the rise in inflation is due to pandemic-related disruptions.” […] “Inflation is the big threat to maximum employment.” […] “Inflation will decline over time, but the question is how fast.” […] “Inflationary pressures are expected to persist until the middle of this year.” […] “If inflation persists for a longer period of time, it is more likely to become entrenched, and our policy will adjust accordingly”. […] “Supply-side concerns have a big impact on energy and food prices, which the Fed can’t change.” […] “It will take two to four meetings to go through the balance sheet decision.” […] “I expect the Fed will raise interest rates this year, end asset purchases, and start allowing the balance sheet to shrink later this year.”
Lael Brainard – Governor – Dovish
Jan 13 – Fed’s Brainard expects many rate increases this year. “Inflation will continue strong in the first two quarters of this year. This year, we expect many rate increases. The fed has a powerful tool, and we will utilize it to reduce inflation over time. I believe we will see inflation coming down to target while the employment picture continues to clear we are dedicated to utilizing our capabilities to combat inflation. I am very concerned about high inflation, and am committed to bringing it down to target. CPI projections must be treated with caution. We are ready to raise interest rates as soon as the asset purchase taper is completed.”
Christopher J. Waller – Governor – Hawkish
Dec 17 – Fed’s Waller Waller Backs March Fed Liftoff. “I believe an increase in the target range for the federal funds rate will be warranted shortly after our asset purchases end,” Waller said, in a speech to the Forecasters Club of New York.” “My outlook is that it’s a very likely outcome – it could happen in March” he said.
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.”
John C. Williams – New York Fed President – Dovish
Dec 2 – Fed’s Williams Says the Fed Will ‘Grapple’ With a Faster Bond-Buying Taper. The risk with the new variant is that “excess demand will continue in the areas that don’t have capacity, and will stall the recovery in the areas where we actually have the capacity.” That, he said, would “mean a somewhat slower rebound overall” and “also does increase those inflationary pressures, in those areas that are in high demand.” Mr. Williams did not explicitly endorse a faster tapering process, saying that “there’s a lot to learn and digest and think about coming up to the next meeting.”
Fed Presidents with voting power in 2022
James Bullard – St. Louis Fed President – Hawkish
Jan 12 – Fed’s Bullard says 4 hikes in 2022 are on the table. “In the face of high inflation, a rate hike in march is highly likely the majority of what is driving inflation right now is demand. […] Four rate hikes in 2022 now appear to be on the table. An early start to rate hikes could help the fed avoid a more hawkish rate path. […] Rate hikes should be accompanied by balance-sheet reductions. […] I expect inflation to ebb to 3% annualized rise by the end of 2022. […] The job market is as tight as anyone has ever seen it.”
Jan 7 – Fed’s Bullard says preferable to raise interest rates sooner rather than later. “The recent inflation shock suggests the fed’s average 2-percentage-point objective will be met for the next several years. […] Focusing on recovering labour force participation in the united states to pre-pandemic levels ignores the pattern of decrease. […] The first interest rate hike could occur in march. The fed is not behind the curve in controlling inflation surge. […] Fed is “extremely shocked” by the degree of inflation, and it is “incumbent” on the central bank to act in order to maintain its credibility. […] I expect inflation to naturally drop to some extent, but not significantly, and to remain above 3% by the end of the year. […] I penciled in 3 2022 rate increases in December. […] It is preferable to raise interest rates sooner rather than later, but the pace can be slowed if inflation moderates. […] Balance sheet runoff should start shortly after the initial interest rate hike.”
Esther L. George – Kansas City Fed President – Hawkish
Jan 11 – Fed George says acceptable to go faster on running down the balance sheet. [No other relevant statements].
Loretta J. Mester – Cleveland Fed President – Neutral
Jan 12 – Fed’s Mester says supports hiking in March if economy looks like now. “The fed had to make a lot of accommodations early in the pandemic, but the economy is now essentially back to full employment and above the inflation objective. […] Depending on what happens with the economy some of the rate hikes further out may need to be moved forward. […] If the economy looks as it does now in march, I would favor raising rates at that meeting. […] If things look like they do today in march I would support raising rates from zero at that point. […] The fed should shrink its balance sheet as quickly as possible without disrupting financial markets. We’ve progressed from pandemic-driven inflation to something more widespread.”
Jan 11 – Fed’s Mester says inflation is too high, Fed must take action. “It is clear to me that inflation is too high and the labor market is robust and the fed must take action. […] The fed’s monetary stance has to be re-calibrated because inflation is higher than the fed’s expected level. […] The fed should be able to run down the balance sheet faster than it did last time. […] At the December meeting, I penciled in three rate rises for 2022”.
Fed Presidents with no voting power in 2022
Thomas I. Barkin – Richmond Fed President – Neutral
Jan 13 – Fed Barkin Says policy will be more aggressive if inflation remains high. “I predict that goods inflation would fall as supply chain pressures ease. […] If needed, the fed is free will begin normalizing rates in march. […] Price levels are not affecting demand in most cases. Labor-force participation is stagnant, and we may have to accept that this is just where it is. […] The timing and speed of any rate hikes will be determined by inflation. […] If inflation remains high and widespread, we will need to pursue normalization more aggressively”.
Jan 11 – Fed Barkin Says March hike is conceivable. “I support the fed’s December shift toward a more hawkish attitude. Supply chain pressures might last into 2023. Upward inflationary pressure may ease in late 2022. The economy is experiencing interim full employment”.
Raphael Bostic – Atlanta Fed President – Hawkish
Jan 11 – Fed Bostic sees three rate hikes in 2022, with risks pointed towards a fourth on the possibility of higher inflation. “Business leaders’ statements anticipate that inflation will endure longer than projected. Wages and other labor market factors are consistent with full employment. Business executives believe they have pricing power and aim to utilize it; they also intend to restructure supply networks to be more resilient but more expensive. March is appropriate for the first hike, and the balance sheet runoff should begin soon after.”
Mary C. Daly – San Francisco Fed President – Dovish
Jan 13 – Fed’s Daly says Fed might raise rates as early as March.“I believe the fed will raise interest rates in 2022, maybe as early as march.”
Jan 6-7 – Fed’s Daly: reduce balance sheet sooner, go gradual on rate hikes.“Inflation is a repressive tax; I’m really concerned about it. […] For a long time, inflation has been higher than I am comfortable with. […] If we act too quickly to combat excessive inflation, we won’t be able to fix supply chain issues. […] We’ve reached a stage where it’s evident that inflation is rising in areas that aren’t immediately affected by covid. […] Even if we raise interest rates a couple of times, policy will remain accommodative. […] I’d rather have a flatter funds rate path and a faster balance sheet adjustment. […] Inflation isn’t as fleeting as we once imagined, and neither is covid. […] The price-wage spiral is not yet in the statistics, but it is worth keeping an eye out for. […] Anchored longer-run inflation expectations make me less concerned about an upward inflation spiral than some others.”
Charles L. Evans – Chicago Fed President – Dovish
Jan 13 – Fed’s Evans says inflation is widespread. “In December, I forecasted three rate hikes in 2022. The bigger worry about inflation is how widespread it will be. […] In order for rate hikes to be effective in lowering inflation, demand must decline. Because inflation has been high for a longer period of time, we must act sooner than i anticipated. […] After we stop buying bonds, we’ll start thinking about how to reduce our balance sheet. […] We need to get inflation back down to around 2%, inflation is likely to be at 2.5% by end of this year. […] I believe it will take a couple of years to get rates to neutral, but this might be hastened. […] The fed expects two, three, or four rate increases this year; we’ll see how that plays out. […] We’ve witnessed wage and price pressures. […] Given strong inflation, the fed’s approach on monetary policy is wrongfooted. […] We need to be adjusting monetary policy to something closer to neutral.”
Patrick T. Harker – Philadelphia Fed President – Hawkish
Jan 13 – Fed’s Harker expects at least 3 hikes this year. “I’ve penciled in three rate hikes for this year, and could be persuaded to add a fourth if circumstances warrant it. […] The sequence will be concluding tapering, raising rates, then reducing balance sheet. After the asset purchase taper is completed in march, we can probably expect a 25-basis point rate hike. […] Inflation is more persistent and higher than anyone would like to see. […] I’m worried that inflation expectations may become unanchored.”
Neel Kashkari – Minneapolis – Dovish
Jan 4 – Fed’s Kashkari predicts two rate hikes in 2022.“I predict two rate hikes in 2022. […] High prices might push inflation expectations past 2%. The costs of ending up in a high-inflation regime are likely to be greater than the costs of ending up in a low-inflation regime. […] The fed’s rate-hiking criteria will be satisfied after the april 2022 data is released. […] Inflation is caused by both demand and supply difficulties. It is uncertain how long it will take for supply chains to normalize.”