” So far, so good. But we have to be nimble here, those are big numbers. “
By Wolf Richter for WOLF STREET.
One of the Fed’s big doves, St. Louis Fed Chairman James Bullard, is making “hawkish” noises, projecting higher inflation and pulling the first rate hike in 2022, after the Fed cut back. postponed the first two rate hikes in 2023 on Wednesday, starting in 2024 back in March. Things are tightening up quickly here. It’s when the doves get “hawkish,” so to speak, that things get real in this Fed.
The “hawks” – in reality, there are no hawks on this Fed, there are only more or less conciliatory people – have already spoken, and no one has paid attention. For example, over a month ago Dallas Fed Chairman Robert Kaplan again pointed out soaring inflation and all kinds of distortions, including in the housing market, and pleaded in favor of reducing purchases of mortgage-backed securities “as soon as possible”. At the time, he was the odd one out.
But the Bullard dove caught everyone’s attention today. The Fed and President Powell have already rattled some nerves on Wednesday with their concerns about inflation and with revelations that, on the one hand, there had been a formal “discussion” on how and when to cut back on purchases of assets, and that the phrase “talk about talking about cutting should be taken out,” as Powell said, and that, second, he has withdrawn his median projections for the first two rate hikes in 2023, starting in 2024.
Bullard is normally trotted on financial TV channels when markets collapse and makes conciliatory statements that then end the slump. But today it was a little different.
Bullard, who will vote in the FOMC in 2022, told CNBC this morning that the FOMC “has been surprised on the upside over the past six months,” in terms of GDP growth, the labor market and inflation.
“We expected a good year, a good reopening. But it’s a bigger year than we expected, more inflation than we expected, and I think it’s only natural that we are a little more hawkish here to contain inflationary pressures ” , he told CNBC.
“The inflationary impulse is more intense than we expected,” he said. “The 3% on PCE core inflation, how long has it been since we saw that!” There is an upside risk to this, with more re-openings in the second half of the year. “
“So I think you might even see upside risks to the inflation forecast. But that’s okay, we were aiming for inflation to rise above target. I think we’re going to get there in 2021 and 2022, and we will approach 2% inflation on the high side, and I think that will be a good path for the US economy, and it will help to cement inflation to longer term expectations at 2%.
“So far everything is fine, but we have to be nimble here, these are big numbers,” he said.
These are really big numbers. Over the past three months, inflation has increased at the highest rate since the early 1980s.
Bullard’s own inflation forecast, based on the core PCE, is higher than the median projection offered by the FOMC on Wednesday.
He justified the postponement of the rate hike in 2022 by his inflation forecasts. “By the end of 2022, you would already have two years of 2.5% to 3% inflation,” he said. “For me that would respect our new framework where we said we were going to allow inflation to exceed target for a while, and from there we could bring inflation down to 2% on the horizon.” following. “
In terms of reducing asset purchases, Bullard said it could promote a faster reduction in MBS purchases. “We don’t need to be in mortgage-backed securities with a booming real estate market and even a looming real estate bubble here, according to some people,” he said. That’s what the Fed Kaplan hawk said a month ago.
“So we don’t want to get back into the real estate bubble game. This caused us a lot of distress in the 2000s. He would be “a little worried to feed on the housing foam that seems to be growing”.
And they might not shrink on autopilot like last time around. “This time around, I mean look at this data,” he said. “Look at how disproportionate all these numbers are [$8 trillion as of Wednesday] and how volatile everything has been. I think we’re going to have to depend more on the state than we have been in the past. “
The official discussion of how and when to reduce asset purchases began on Wednesday – Powell has said it before. Powell has repeatedly pointed out that the Fed would end QE before starting rate hikes, as it did last time around, when QE ended in late 2014 and rate hikes started in December 2015 .
But there is a big difference. The last time around, inflation was relatively subdued. The Fed’s core PCE measure was around 1.5%, and below the Fed’s target of 2%. And the Fed still ended QE and then, a year later, started rate hikes. The Core PCE did not reach the Fed’s target of 2% until 2018, when the Fed had already started quantitative tightening (QT, the opposite of QE).
Now the core PCE is at 3.1%, the highest since 1992, and the pace over the past two months was much higher, the highest since the 1980s. And that’s what we’re seeing now: the timing of the end of QE and the rate hike is tightening.
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