“So far so good. But we have to be nimble here, these are big numbers.”
By Wolf Richter for WOLF STREET.
One of the big Fed doves, St. Louis Fed President James Bullard, is making “hawkish” noises, projecting higher inflation and pulling the first rate hike into 2022, after the Fed pulled the first two rate hikes into 2023 on Wednesday, from 2024 back in March. Things are tightening up quickly here. It’s when the doves turn “hawkish,” as it were, that things get real at this Fed.
The “hawks” – in reality, there are no hawks on this Fed, there are only folks who are more or less dovish – have already spoken, and no one paid attention. For example, over a month ago, Dallas Fed President Robert Kaplan once again pointed at surging inflation and all kinds of distortions, including in the housing market, and advocated for tapering purchases of mortgage backed securities, “sooner rather than later.” At the time, he was the odd man out.
But dove Bullard got everyone’s attention today. The Fed and Chair Powell already jostled some nerves on Wednesday with their inflation concerns, and with revelations that, one, there had been an official “discussion” about how and when to taper asset purchases, and that the phrase “talking about talking about tapering should be retired,” as Powell said, and that, two, it has pulled its median projections for the first two rate hikes into 2023, from 2024.
Bullard normally gets trotted out on the financial TV channels when markets sag, and gets to make dovish statements that then end the sag. But today was a little different.
Bullard, who will be in a voting slot at the FOMC in 2022, told CNBC this morning that the FOMC “has been surprised to the upside over the last six months,” in terms of GDP growth, the labor market, and inflation.
“We were expecting a good year, a good reopening. But this is a bigger year than we were expecting, more inflation than we were expecting, and I think it’s natural that we’ve tilted a little bit more hawkish here to contain inflationary pressures,” he told CNBC.
“The inflationary impulse is more intense than we were expecting,” he said. “The 3% on core PCE inflation, how long has it been since we’ve seen that! There is some upside risk to that, with more reopening to occur in the second half of the year.”
“So I think you could even see some upside risks to the inflation forecast. But that’s OK, we were targeting to get inflation up above target. I think we’re going to achieve that in 2021 and 2022, and we’ll approach 2% inflation from the high side, and I think that will be a good path for the US economy, and that will help cement longer-run inflation expectations at 2%.
“So far so good, but we have to be nimble here, these are big numbers,” he said.
These are truly big numbers. Over the past three months, inflation has surged at the red-hottest pace since the early 1980s.
Bullard’s own inflation forecast, based on core PCE, is higher than the median projection offered up by the FOMC on Wednesday.
He justified pulling the rate hike into 2022 by his inflation forecast. “By the time you get to the end of 2022, you’d already have two years of 2.5% to 3% inflation,” he said. “To me, that would meet our new framework where we said we’re going to allow inflation to run above target for some time, and from there we could bring inflation down to 2% over the subsequent horizon.”
In terms of tapering the asset purchases, Bullard said he might favor a more rapid reduction in MBS purchases. “We don’t need to be in mortgage-backed securities with a booming housing market and even a threatening housing bubble here, according to some people,” he said. Which is what Fed hawk Kaplan had said a month ago.
“So we don’t want to get back in the housing bubble game. That caused us a lot of distress in the 2000s.” He’d be “a little bit concerned about feeding into the housing froth that seems to be developing.”
And they might not taper on automatic pilot, unlike last time. “This time around, I mean look at this data,” he said. “Look at how outsized all these numbers are [$8 trillion as of Wednesday] and how volatile everything has been. I think we’re going to have to be more state-contingent than we have been in the past.”
The official discussion about how and when to taper the asset purchases started on Wednesday – Powell already said that. Powell pointed out repeatedly that the Fed will end QE before it starts the rate hikes, same as it had done last time, when QE ended in late 2014, and rate hikes started in December 2015.
But there is a big difference. Last time, inflation was relatively benign. The Fed’s measure, core PCE, was running at around 1.5%, and below the Fed’s target of 2%. And the Fed still ended QE and then a year later began the rate hikes. Core PCE didn’t rise to the Fed’s target of 2% until 2018, by which the Fed had already started quantitative tightening (QT, the opposite of QE).
Now core PCE is at 3.1%, the highest since 1992, and the pace over the past two months was much higher, the hottest since the 1980s. And this is what we’re seeing now: The schedule of ending QE and hiking rates is getting tightened up.
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