In the last few days we have heard from several FOMC participants (Clarida, Bowman, Daly, Evans, Bullard, George, Harker, Kashkari, and Powell himself at the press conference) on inflation and possible future monetary policy actions.
What to keep in mind
All participants continue to think that the current elevated inflation will be transitory. There is, however, some disagreement about the extent and the timing (that is, when inflation will moderate and to what level it will settle going forward).
Some participants have acknowledged that the inflationary pressures are more widespread than previously communicated and that housing will put additional upward pressure going forward.
Several participants perceive that it will take at least another 6 months before the data will make it clear whether the current Fed staff / FOMC outlook for inflation is correct. In the meantime, uncertainty will remain elevated.
As for hiking, several participants think that the conditions for hiking might be met mid-’22. In this regard, please note that the most hawkish members, such as Bullard, are anticipating no more than 2 hikes in 2022 (therefore, our current assumption of 1 hike -which is based on the 2021 Fed staff Taylor rule- appears to be in line with the median participant/voter).
According to our “FOMC-meter”, 5 FOMC members have recently expressed dovish statements, 6 participants have expressed neutral statements, and 5 members (out of which only 2 with voting power) have expressed hawkish statements. As usual in the Table below, most recent statements are reported in blue.
Jerome H. Powell
Richard H. Clarida
Randal K. Quarles
MIchelle W. Bowman
Thomas I. Barkin
Mary C. Daly
Loretta J. Mester
Patrick T. Harker
Esther L. George
Recent FOMC participants' statements
Jerome H. Powell – Chair – Dovish
Nov 3 – Fed Powell: Federal Reserve is not behind the curve. In his prepared speech, Powell said that “it remains the case that the drivers of higher inflation have been predominantly connected to the dislocation caused by the pandemic. Specifically, the effects on supply and demand from the shutdowns, the uneven reopening, and the on-going effect of the virus effect. […] Our tools cannot ease the supply constraints. […] We continue to believe that our dynamic economy will adjust to the supply and demand imbalances and that as it does, inflation will decline to much closer 2 percent target. As for inflation being transitory, Powell stressed two things: 1) The Fed has a dual mandate; the current level of inflation is not consistent with price stability but the labor market is not at full employment and 2) the word “transitory” means different things to different people (for some, it means “short-lived”, while for the Fed it means it will not leave a permanent print on inflation rate).
Oct 1 – Fed Powell admits inflation might be more persistent than anticipated. “The current inflation spike is really a consequence of supply constraints meeting very strong demand. And that is all associated with the reopening of the economy, which is a process that will have a beginning, middle and an end. It’s very difficult to say how big the effects will be in the meantime or how long they last.” Powell said at the European Central Bank (ECB) Forum on Central Banking 2021 via video conference. “It’s also frustrating to see the bottlenecks and supply chain problems not getting better – in fact, at the margins apparently getting a little bit worse. We see that continuing into next year probably, and holding up inflation longer than we had thought.” Powell added. Importantly, Powell added ““Managing through that process over the next couple of years is… going to be very challenging because we have this hypothesis that inflation is going to be transitory. We think that’s right. But we are concerned about underlying inflation expectations remaining stable, as they have so far.”
Richard H. Clarida – Vice Chair – Neutral
Nov 8 – Clarida continues to believe inflation is transitory. In a prepared remarks at Brookings, Clarida said: “Although in a number of sectors of the economy the imbalances between demand and supply—including labor supply—are substantial, I do continue to judge that these imbalances are likely to dissipate over time as the labor market and global supply chains eventually adjust and, importantly, do so without putting persistent upward pressure on price inflation and wage gains adjusted for productivity.” As for expectations, Clarida said: “and so long as inflation expectations remain well anchored at the 2 percent longer-run goal—which, based on the Fed staff’s common inflation expectations (CIE) index, I judge at present to be the case”. Finally, regarding hiking: “While we are clearly a ways away from considering raising interest rates, if the outlooks for inflation and unemployment I summarized a moment ago turn out to be the actual outcomes realized over the forecast horizon, then I believe that these three necessary conditions for raising the target range for the federal funds rate will have been met by year-end 2022”.
Oct 12 – Clarida continues to see underlying inflation close to 2 percent. “I continue to believe that the underlying rate inflation in the U.S. economy is hovering close to our 2 percent longer-run objective and, thus, that the unwelcome surge in inflation this year, once these relative price adjustments are complete and bottlenecks have unclogged, will in the end prove to be largely transitory”. “I believe, as do most of my colleagues, that the risks to inflation [forecasts] are to the upside, and I continue to be attuned and attentive to underlying inflation trends, in particular measures of inflation expectations, including the Board staff’s index of common inflation expectations.”
Randal K. Quarles – Vice Chair – Neutral
Oct 20 – Fed Quarles thinks that the FOMC is not behind the curve. “I think it is clear that we have met the test of substantial further progress toward both our employment and our inflation mandates, and I would support a decision at our November meeting to start reducing these purchases and complete that process by the middle of next year.”, he said. “Supply constraints in production and distribution already have become more widespread and have lasted longer than most forecasters anticipated. As noted earlier, labor supply constraints are making it difficult for businesses to keep up with demand. This dynamic will continue to support robust wage growth, putting further upward pressure on prices. Moreover, there is evidence in the past couple of months that a broader range of prices are beginning to increase at moderate rates, and I am closely watching those developments.” […] “I am among those who see a good chance that inflation will remain above 2 percent next year, but I am not quite ready to conclude that this “transitory” period is already “too long.” “. “I do not see the FOMC as behind the curve, for three reasons: Most of the biggest drivers of the very high current inflation rates will ease in coming quarters, some measures of underlying inflation pressures are less worrisome, and longer-term inflation expectations are anchored, at least for now.”. “Going forward, the question is not only whether inflation will fall in the coming months, but also how far it will fall and if it will fall soon enough to avoid spurring a concerning rise in longer-term inflation expectations.”. However, “If inflation does remain more than moderately above 2 percent, be assured that the FOMC has the framework and the tools to address it.”
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
Oct 19 – Fed’s Waller Sees upside risks to inflation. “I continue to believe that the escalation of inflation will be transitory and that inflation will move back toward our 2 percent target next year. That said, I am still greatly concerned about the upside risk that elevated inflation will not prove temporary.”, Waller said. “Based on my outlook for the economy, however, I do not expect liftoff to occur soon after tapering is completed. The two policy actions are distinct. I believe the pace of continued improvement in the labor market will be gradual, and I expect inflation will moderate, which means liftoff is still some time off. That said, as I mentioned earlier, if my upside risk for inflation comes to pass, with inflation considerably above 2 percent well into 2022, then I will favor liftoff sooner than I now anticipate. A major consideration will be my judgment about whether inflation expectations are at risk of becoming “unanchored”—rising substantially and persistently above 2 percent.”
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.”
Oct 13 – Fed Board Bowman sees inflation as transitory but says that bottlencks could take time so solve. “Earlier this year, as the economy was reopening, we saw a pronounced pickup in inflation, as prices for motor vehicles, electronics, and other goods rose especially rapidly” “We are seeing shipments at record levels, and more capacity is expected to come on line, but the combination of strong demand and intermittent disruptions to this complex supply chain poses a risk that it could be some time before semiconductor supply issues are resolved.”. As for additional risks around the forecast, Bowman said that one “source of inflation risk comes from the lower labor force participation, which, as I mentioned earlier, has led some firms to offer inducements to bring potential workers back, including hiring bonuses and higher wages. Even with these incentives, however, many firms are struggling with staffing, and some are also offering training programs for new hires to develop required job skills. Wage increases and these additional employee investments are increasing firms’ costs, potentially adding to inflationary pressures.”
Thomas I. Barkin – Richmond Fed President – Neutral
Oct 22 – Fed Barkin favors finishing taper before considering rate hike. “My preference would be to finish tapering before you look to rates”, he said. “You do not want to be doing both at the same time. It is a real mixed message”.
Oct 14 – Fed Barkin says more data are needed before rate hikes are appropriate. “We still have a lot to learn about whether recent inflation levels will be sustained and how much room we have to run in the labor market until we get to maximum employment,” he said. According to Barkin, inflation is heavily driven by the auto sector, adding that supply chain issues are prompting an increase in food and energy costs. However, he argued that certain aspects of inflation are easing. Nevertheless, he said that “If it turns out inflation isn’t transitory, there’s no shame in saying that.”.
Raphael Bostic – Atlanta Fed President – Hawkish
Oct 21 – Fed’s Bostic sees interest rate hike coming next year as inflation lingers. The central bank official told CNBC that he has “penciled in” a rate increase in “late third, maybe early fourth” quarter of 2022. As for inflation, “The disruptions are going to last longer than we expected,” Bostic said. “The labor markets are not going to get to equilibrium as quick as we hoped, but demand was also going to stay high and that combination was going to mean we’re going to have inflationary pressures. The more I talk to folks, it’s becoming clearer and clearer this is going to last into 2022.”
Oct 12 – Fed’s Bostic Sees Risk of Un-Anchored Inflation. “Up to now, indicators do not suggest that long-run inflation expectations are dangerously untethered,” he said during a virtual event organized by the Peterson Institute for International Economics. “But the episodic pressures could grind on long enough to unanchor expectations.” Bostic, who has a vote in the Fed’s policy-setting committee this year, said he and his staff will stop referring to inflationary pressures as “transitory.” Finally, he said that Inflation Surge Will Likely Last Longer Than Expected and that inflation might remain above 2% target in 2022.
Mary C. Daly – San Francisco Fed President – Neutral
Nov 9 – Fed’s Daly looks to mid-2022 for more clarity on jobs, inflation. “Let’s be patient” and wait to see if inflation fades when the pandemic does, as she expects, she said, adding supply chain disruptions may keep prices elevated until well into next year.“I’m looking at the summer of 2022 is when we should – knock on wood, no more variants, no more delta surges – get some clarity,” she said. It will also take about six months to get clarity on the state of the labor market, she said.
Oct 22 – Fed Daly Says Standing Pat Is Right Course for Monetary Policy Now. “Just because we are standing pat, being patient, is not the same as being asleep,” Daly said. Raising rates now would not solve the global supply-chain issues but could start to bridle growth next year just as inflation pressures are receding and cost the economy both output and jobs, she said.
Charles L. Evans – Chicago Fed President – Dovish
Nov 8 – Fed’s Evans: inflation rise is ‘temporary,’ but sees upside risk. “I had expected to see more progress by now,” Evans said in remarks prepared for delivery to the Original Equipment Suppliers Association, adding that there are signs that inflationary pressures may be building more broadly, including increases in rents. “These developments deserve careful monitoring and present a greater upside risk to my inflation outlook than I had thought last summer.”
Oct 6 – Fed’s Evans: high inflation to fall as supply bottlenecks addressed. According to Evans, supply bottlenecks are driving most of the recent increase in inflation, and though it is higher and may last longer than initially thought, it will subside. He also repeated his view, in line with most other Fed policymakers, that the U.S. central bank is close to the time it will begin reducing its monthly asset purchases, and would not be surprised if the taper is complete by mid-2022 or the fall.
John C. Williams – New York Fed President – Dovish
Sep 27 – Fed’s Williams predicts the high rate of inflation this year will cool to 2 percent in 2022. Williams pointed to ongoing shortages in labor and business supplies as a big contributor in the sharp increase in inflation this year as companies have had to pay more for wages and materials, leading to higher prices for a variety of products. Although inflation is now well above the Fed’s 2% target, Williams said he expects price pressures to ease as the pandemic fades and business returns close to normal. Yet he admitted the outlook is uncertain and he didn’t put a precise timetable on when inflation would return to the 2% range.
Sep 8 – Fed’s Williams expects inflation to come back down to around 2 percent next year. According to Williams, “it’s clear that this spike in inflation largely reflects the transitory effects” […] “I expect inflation pressures to moderate over time and for the inflation rate to come back to its underlying trend of around 2 percent next year.” Finally, he added that “Assuming the economy continues to improve as I anticipate, it could be appropriate to start reducing the pace of asset purchases this year.”.
James Bullard – St. Louis Fed President – Hawkish
Nov 8 – Fed’s Bullard says he sees two rate hikes in 2022. “If inflation is more persistent than we are saying right now, then I think we may have to take a little sooner action in order to keep inflation under control,” Bullard said in an interview on Fox Business Network. Asked if the Fed could then raise rates three or four times next year, Bullard said “that is not my base case right now.” The Fed has already “done a lot to move the policy in a more hawkish direction,” he said, with the Fed’s plan to pare its asset purchases, announced last week, starting earlier and projected to end sooner than had been anticipated just six months earlier.”
Oct 14 – Fed’s Bullard sees real risk that inflation remains stubbornly high next year. According to Bullard, “we’re facing a higher inflation rate than we would like to see in the U.S. economy.” There is still a 50% chance that high inflation will “dissipate naturally,” he said. Also, few days before Bullard said that “I am concerned about the changing mentality I would say around prices in the economy and the relative freedom that businesses feel that they can just pass on increased costs easily to their customers”. “For years this has not been the case in the U.S.,” Bullard said. “They felt like if they raised prices, they would lose market share. It would hurt their business. And consumers were rabid about moving to the lower-cost places, low-cost products. That may be breaking down.” Finally, he added that “I am concerned that the risks are to the upside, that we will continue to get higher than anticipated inflation and that this higher inflation will persist into 2022. It will dissipate somewhat but not down to where we would like it to be in 2022.”.
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”.
Oct 1 – Fed’s Harker sees higher inflation this year and the next. In a speech, Fed Harker said that “nflation, meanwhile, should come in around 4 percent for 2021 — we’re already seeing some moderation there, as prices of used cars finally stabilize. After that, we can expect inflation of a bit over 2 percent for 2022 and right at 2 percent in 2023.”. As for policy actions, Harker said that ” I am in the camp that believes it will soon be time to begin slowly and methodically — frankly, boringly — tapering our $120 billion in monthly purchases of Treasury bills and mortgage-backed securities. […] After we taper our asset purchases, we can begin to think about raising the federal funds rate. But I wouldn’t expect any hikes to interest rates until late next year or early 2023.”
Neel Kashkari – Minneapolis – Dovish
Nov 9 – Fed’s Kashkari: next nine months key for getting clarity on economic outlook. “I’m optimistic, in the next three, six, nine months we will get a lot more information,” and clarity about the outlook for both inflation and the labor market, he said.
Oct 1 – Fed’s Kashkari Is Comfortable With Plans to Taper Bond Buying Soon. Federal Reserve Bank of Minneapolis President Neel Kashkari thinks short-term interest rates will stay near zero for a few more years, but he supports a likely imminent pullback on the central bank’s bond-buying stimulus.
Loretta J. Mester – Cleveland Fed President – Neutral
Oct 20 – Fed Mester Says No Rate Hike ‘Any Time Soon,’ Watching Inflation. “The thought about raising interest rates is not a near-term consideration at all,” she told CNBC television in an interview. “We’re going to think about the decision coming up, which is about the asset purchases, and then as those wind down we’ll have time to assess where the economy is.” “I don’t think that interest rate hikes are coming any time soon because I don’t think we’ll reach our goals which are maximum employment and inflation at and above 2% for some time,” Mester said. “So far the medium-run inflation expectations and longer-run inflation expectations are still at levels consistent with our 2% inflation goal,” she said. “We don’t want to get into a situation where they continue to move up because that would be a signal that we may have to do an adjustment.” “If we are still seeing 4% inflation or in that area next spring, then I think we might have to reassess the speed with which we would be thinking about raising interest rates,” she said.