FOMC participants communication: a hawk in a china shop.
An update on the latest FOMC participants’ statements on inflation and possible path for monetary policy.
We have heard from several participants: Bullard, Mester, Barkin, Bostic, and Daly. See below for their words.
Comment about Bullard’s words
In our latest update we wrote “hikes are coming but expect much less forward guidance than in the past”. Even considering the high uncertainty of the current economic environment, we were surprised by Bullard (a hawk in a china shop) for three reasons. First, in our view Bullard gave the impression the FOMC is (almost) in panic. As such, he should have been much more prudent. Second, in our view his comments were unnecessary, especially because the path of the Federal Funds rates he suggested (100bps in the bag by July) is not materially different (from a monetary policy perspective) compared to a sequence of 3 25bps in the next 3 meetings. On this point, we report what Bullard said on February 1 (see below for full statement): “Fifty basis points, I don’t think helps us — at least sitting here today, I don’t think that really helps us […] I don’t think you are going to see inflation moderate here in the next couple of reports.“. Therefore, we remain unsure about the source of his 180 degrees twist. Third, the upward surprise in yesterday CPI (0.1% in core) was (relatively) small and should not materially change the trajectory of the projection.
Bullard has been right in his diagnosis about the US economy since the start of the pandemic so his words cannot be dismissed because he might be more influential than in the past. But he also has a reputation for being an outlier at the FOMC table (please note than Bostic -one of the most hawkish participants- the day before could only see 3 25bps hikes in 2022). While we think that the Fed is late and hikes should have started months ago, rationality caution against taking Bullard’s words literally this time in our view. In the end, we would not be surpised (even considering markets probability of 50bps in March) if Chair Powell would compromise with a 25bps start in March, signal a sequence of hikes until inflation moderates, and push for an earlier (and more aggressive) QT especially considering the slope of the yield curve.
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: FOMC voters are bolded.
Recent FOMC participants' statements - most recent statements in blue
Jerome H. Powell – Chair – Dovish
January 26 (FOMC press conference)
From Fed transcripts (here). Page 7: “I also would point out that there are other forces at work this year, which should also help bring down inflation. We hope including improvement on the supply side, which will ultimately come at the timing and pace of that are uncertain. And also, fiscal policy is going to be less supportive of growth this year, not at the level of economic activity but the fiscal impulse to growth will be significantly lower. So there are multiple forces which should be working over the course of the year for inflation to come down. We do realize that the timing and pace of that are highly uncertain and that inflation has persisted longer than we thought. And, of course, we’re prepared to use our tools to assure that higher inflation does not become entrenched.” Page 16: “since the December meeting, I would say that the inflation situation is about the same but probably slightly worse. I’d be inclined to raise my own estimate of 2022 core PCE inflation, let’s just go with that, by a few tenths today. But we’re not writing down an SEP at this meeting, but I think it’s — it hasn’t gotten better. It’s probably gotten just a bit worse, and that’s been the pattern.”
Lael Brainard – Governor – Dovish
No recent statements.
Christopher J. Waller – Governor – Hawkish
No recent statements.
Michelle W. Bowman – Governor – Neutral
No recent statements.
John C. Williams – New York Fed President – Dovish
No recent statements.
Fed Presidents with voting power in 2022
James Bullard – St. Louis Fed President – Hawkish
February 10
From Bloomberg (here).“I’d like to see 100 basis points in the bag by July 1,” Bullard, a voter on monetary policy this year, said in an interview with Bloomberg News. “I was already more hawkish but I have pulled up dramatically what I think the committee should do.” “You have got the highest inflation in 40 years and I think we are going to have to be far more nimble and far more reactive to data.” “There was a time when the committee would have reacted to something like this [the CPI report] to having a meeting right now and doing 25 basis points right now,” Bullard said. “I think we should be nimble and considering that kind of thing.” “As a general principle, I see no reason why you can’t remove accommodation just as fast as you added accommodation, especially in an environment where you have the highest inflation in 40 years,” Bullard said. “That second part might involve asset sales,” he said. “I would very much like the committee to consider that as a possibility, so we can do that if we need to — because inflation is not decelerating as we had hoped.”
February 1
From Bloomberg (here): “Fifty basis points, I don’t think helps us — at least sitting here today, I don’t think that really helps us” Bullard said in a Reuters interview live-streamed on Twitter. “I think we can get a disciplined approach to raising the policy rate and the expectations are already in markets.” “The markets are pricing in five. I think that is not too bad a bet right now. A lot is going to depend on how inflation develops during the year,” he said. “I don’t think you are going to see inflation moderate here in the next couple of reports. But by the time you get to the middle of the year you will see whether that is developing or not.” “We can take some steps now to better position monetary policy and then get to the middle of the year and see where we are,” he said. “By the time we get to July August time-frame, we’ll be able to assess.”
Esther L. George – Kansas City Fed President – Hawkish
January 31
From Kansas City Fed website (here). Page 6: “With inflation running at close to a 40-year high, considerable momentum in demand growth, and abundant signs and reports of labor market tightness, the current very accommodative stance of monetary policy is out of sync with the economic outlook.” Page 7: “What we do on the balance sheet will likely affect the path of policy rates and vice versa. For example, more aggressive action on the balance sheet could allow for a shallower path for the policy rate. Alternatively, combining a relatively steep path of rate increases with relatively modest reductions in the balance sheet could flatten the yield curve and distort incentives for private sector intermediation, especially for community banks, or risk greater economic and financial fragility by prompting reach-for-yield behavior from long-duration investors.” Page 8: “All in all, it could be appropriate to move earlier on the balance sheet relative to the last tightening cycle.” […] “By holding long duration assets, the Fed’s balance sheet is depressing the price of duration, by lowering longer-term yields by as much as 1.5 percentage points according to some rules-of-thumb, incentivizing reach-for-yield behavior and increasing fragility within the financial system.”
Loretta J. Mester – Cleveland Fed President – Neutral
February 9
From Cleveland Fed (here): “Currently, the imbalances between demand and supply in product and labor markets are contributing to the very high inflation readings. Firms tell us that they are having little trouble passing on their higher costs to their customers.” “In my view, even with the upward revisions, the risks to inflation are still tilted to the upside.” “I do expect some improvement in inflation readings later in the year as demand moderates and capacity constraints in both product and labor markets begin to ease. But the timing and magnitude of that easing of constraints remain uncertain. My expectation is that inflation will moderate but remain above 2 percent this year and next, but this forecast is conditional on the FOMC taking appropriate action.”
“What about the future course of monetary policy? […] The last time we began such a process was in December 2015, and it was a very gradual process, […]. This time, I anticipate that it will be appropriate to move the funds rate up at a faster pace because inflation is considerably higher and labor markets are much tighter than in 2015. In my view, increases in the fed funds rate in the coming months will be needed, but the ultimate path of the fed funds rate in terms of the number and pace of increases will depend on how the economy evolves. For example, if by mid-year, I assess that inflation is not going to moderate as expected, then I would support removing accommodation at a faster pace over the second half of the year. On the other hand, if inflation moves down faster than expected, then the pace of removal could be slower in the second half of the year than in the first half.”
“I would support selling some of our mortgage-backed securities at some point during the reduction period to speed the conversion of our portfolio’s composition to primarily Treasuries.” […] “So in my view, conditions warrant that we start balance-sheet reductions soon and go at a faster pace than we did last time.”
Fed Presidents with no voting power in 2022
Thomas I. Barkin – Richmond Fed President – Neutral
February 10
From Bloomberg (here): Richmond Fed President Thomas Barkin said that while he’s open to a 50 basis-point rate increase “conceptually,” now isn’t the time for such a move. “There’ll be times where we’ll need to do that. There’ve been times in the past where we have done it. Do I think there’s a screaming need to do it right now? I’d have to be convinced of that,” he said in a virtual discussion hosted by the Stanford Institute for Economic Policy Research on Thursday.
January 31
From Bloomberg (here): “I’d like the Fed to get better positioned. I think we’ve got a good part of the year to get there,” he said. “That position is somewhere closer to neutral, certainly than we are now, and I think the pace of that just depends on the pace of inflation.”
Raphael Bostic – Atlanta Fed President – Hawkish
February 9
From CNBC (interview here): Speaking on CNBC’s the policymaker signaled a view that is less aggressive than the market’s on rates. “In terms of hikes for the interest rates, right now I have three forecast for this year,” he said. “I’m leaning a little towards four, but we’re going to have to see how the economy responds as we take our first steps through the first part of this year.” “For me, I’m thinking very much of a 25-basis-point perspective” he said. “But I want everyone to understand that every option is on the table, and I don’t want people to have the view that we’re locked into a particular trajectory in terms of how our rates have to move over time. We’re really going to let the data show us to what extent a 50 basis point or 25 basis point move is appropriate.” Bostic added that he remains positive on growth through the year and doesn’t think the Fed will have to deploy measures to slow the economy. “The first part of the reduction I think we can do pretty significantly,” he said. “I think that we should really be looking into ways to remove that excess liquidity that the market has shown us exists so that we can then get into decisions about what the use of the balance sheet should look like in terms of a menu of tightening our policy.”
January 29
From FT (here): “Every option is on the table for every meeting,” Bostic said. “If the data say that things have evolved in a way that a 50 basis point move is required or [would] be appropriate, then I’m going to lean into that . . . If moving in successive meetings makes sense, I’ll be comfortable with that.” “Our policy path is not a constriction path. It’s a less accommodative path,” he said. “If we do the three [interest rate increases] that I have in mind, that’ll still leave our policy in a very accommodative space. “I don’t think there’s going to be a lot of constraint on growth as we remove these emergency actions.”
Mary C. Daly – San Francisco Fed President – Dovish
February 9
From Reuters (here): “We could have it be worse before it gets better but it is definitely going to get better,” Daly told CNN, adding that even so she doesn’t expect inflation to have fallen to 2% by the end of the year.
February 2
From MarketWatch (interview here): “It is clear that inflation is too high and the labor market is strong, so we do need to act,” Daly said. “I do absolutely expect the policy rate to rise over the course of the year, but by how much and how quickly and during what meetings — those things I’m going to leave open,” Daly said. “I don’t want to pronounce today what I think we will be doing at each and every meeting for the rest of 2022.” “I’m very open minded — very data dependent on this” she added. Asked about her forecast for inflation by the end of the year, Daly said it is unlikely that the Fed can push it all the way back to 2%. “I don’t see evidence the labor market is overheated,” Daly said. “I see some of this current heat that people point to as just a temporary factor,” she said.
Charles L. Evans – Chicago Fed President – Dovish
No recent statements.
Patrick T. Harker – Philadelphia Fed President – Hawkish
February 1
From Bloomberg (here): “I would be supportive of a 25 basis-point increase in March. Could we do 50? Yeah. Should we? Well, I’m a little less convinced of that right now,” Harker said Tuesday in an interview on Bloomberg Television. “But we’ll see how the data turn out in the next couple of weeks.” “If inflation stays where it is right now and continues to start to come down, I don’t see a 50 basis-point increase. But if we see a spike, then I think we might have to act more aggressively” he said. “Right now, I think four 25 basis-point increases this year is appropriate but there’s a lot of risk here,” […] “This is where we need to keep flexible with respect to policy. We can’t define a path right now and just stick to it. We’ve got to look at the data,” Harker said.
Neel Kashkari – Minneapolis – Dovish
January 28
From Reuters (here): “The way we bring that into balance is, we will tend to tighten monetary policy by raising interest rates,” Kashkari told NPR News. “That would then not tap the brakes on the economy, but it would let our foot off the accelerator just a little bit,” he said, adding that “we just don’t know” how many rate hikes that will take. “A lot of the reason that prices are high right now are temporary factors related to the COVID,” Kashkari said. “The hope is that as the supply chains sort themselves, out some of these price pressues will naturally relieve themselves. And that means the Federal Reserve will have to do less.” “We have to see how the data comes out,” he said. “We just don’t know – it’s going to depend on what happens to supply chains, what happens to workers.”