Yesterday was an intriguing day and no I am not referring to the record numbers watching Flight Radar to follow the flight carrying Nancy Pelosi to Taiwan. What we saw was a stepping up of open mouth operations by policymakers at the US Federal Reserve.
Aug 2 (Reuters) – The Federal Reserve’s work of bringing down inflation is “nowhere near” done, San Francisco Fed President Mary Daly said on Tuesday, adding U.S. central bank officials are “still resolute and completely united” in the task of achieving price stability.
She also denied that the Federal Reserve would switch to cutting interest-rates next year.
“That would not be my modal outlook,” she said. “My modal outlook, or the outlook I think is most likely, is really that we raise interest rates and then we hold them there for a while at whatever level we think is appropriate.”
She presented herself as a doughty inflation fighter.
“The number of people who can’t afford this week what they paid for with ease six month ago just means our work is far from done,” Daly said.
That is quite a change of view from someone who was previously an inflation fan. From February 2020
(Reuters) – A top U.S. central banker on Monday called for using new tools to push up stubbornly low inflation as an aging population slows economic growth worldwide and globalization and other trends keep a lid on prices.
“We need to embrace the mindset that inflation a bit above target is far better than inflation a bit below target in today’s economic environment,” San Francisco Federal Reserve Bank President Mary Daly said on Monday in remarks prepared for delivery in Dublin, Ireland.
So she has what she wished for. Indeed in 2021 she got the opportunity to vote for it. Apparently she is now not so keen or more realistically is afraid of what the response would be if she said that now.
This backed up the words of another Federal Reserve policymaker Neel Kashkari from last week.
“Whether we are technically in a recession or not doesn’t change my analysis,” Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, told CBS’ “Face the Nation” on Sunday. “I’m focused on the inflation data. I’m focused on the wage data. And so far, inflation continues to surprise us to the upside. Wages continue to grow.” ( CNBC)
This was rather awkward for the man most associated with the policies that helped push inflation higher in the first place. In fact markets simply ignored him as a man with zero credibility.
The barrage of open mouth operations continued though.
In a separate interview on Tuesday, Chicago Fed president Charles Evans said he thought that a 0.5 percentage point increase at the next meeting in September would be appropriate. However, he left the door open to a larger 0.75 percentage point rise, which he said “could also be OK”. ( Financial Times)
A decade or so ago Charles Evans made the case for inflation at 3% or 4% to “catch up” on inflation being below target. This was based on the now abandoned claims from central bankers that they had the “tools” to reduce above target inflation and could do so easily. That was a complete lie as the present situation is showing. Sadly they never get challenged on this.
But I have selected these 3 because they have for years sung along with Prince.
This is what it sounds like
When doves cry
What does this mean?
We got some actual numbers from the President of the St.Louis Fed in a speech from New York.
Fed‘s Bullard: Repeats Wants Policy Rate At 3.75%-4% By Year-End – Fed Needs To Get Into More Restrictive Rates Territory ( @LiveSquawk)
He is in a different category to the others mentioned so far as he has been keener on dealing with inflation, but he does seem to have a bit of a problem with these thoughts.
The Fed and the ECB have considerable credibility compared with their 1970s counterparts, suggesting that a soft landing is feasible in the U.S. and the EA if the post-pandemic regime shift is executed well.
I would ask what is he smoking? But I doubt that there is anything strong enough to make you think that. As Earth Wind & Fire put it.
Every man has a place, in his heart there’s a space
And the world can’t erase his fantasies
Take a ride in the sky, on our ship, Fantasii
All your dreams will come true, right away
We can now switch to the apparently rather similar thoughts of Charles Evans.
Evans noted that he thinks rates will have to rise to between 3.75 percent and 4 percent by the end of next year but cautioned against too quick a path to get there should the Fed have to retrench unexpectedly on the back of a changing landscape. ( thenews.com.pk)
So the same level but later. Although he is not much good at predicting the future.
April 19 (Reuters) – Chicago Federal Reserve Bank President Charles Evans on Tuesday said the Fed could raise its policy target range to 2.25%-2.5% by year end.
It is already there.
Comment
Let me start with what the Federal Reserve is trying to so here. It is not a coincidence that so many Fed speakers have appeared at the same time to sing in a chorus. The problem with attempting to set an agenda via open mouth operations comes from their most recent policy move.
“While another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data we get between now and then,” Powell said, noting that there will be two full months of data before the Fed’s next meeting, in September. ( Reuters)
That was an abandonment of Forward Guidance which had become very strict even involving leaking interest-rate moves to Nick Timiraos of the Wall Street Journal. Now we are only one week later being guided again via all these speeches.
The reason for this is something that I have regularly pointed out which is that markets were ignoring the interest-rate rises and instead concentrating on the upcoming expected deterioration in the economy. So 1.5% increases in official interest-rates were accompanied by the benchmark ten-year yield falling by more than 0.8%. This left the Fed in quite a mess because they thought they had been clever in letting the rise in bond yields do the inflation fighting for them. The most obvious example of this is the way that the 15 and 30 year mortgage rates rose. But now they will be falling just as inflation has soared leaving the Fed with yet more egg on its face.
The response has mostly been we do not believe you.
But the comments from Daly, Evans and Mester moved futures markets, with expectations for where the Fed’s benchmark policy rate will stand in December rising from 3.27 per cent on Monday to 3.39 per cent on Tuesday.
Yes bond yields rose but by much, much less than the amounts they had fallen by.
Oh and it was the central banks that created this although the Financial Times fails to mention it.
Investors also cautioned that liquidity in the Treasury market — the ease with which traders can buy and sell — is poor, with many market participants on holiday this month. A deterioration in liquidity can lead to big swings in the price of securities.
Not the holiday season as they did not create that! The fact is that everywhere QE has gone liquidity has worsened with the extreme case being Japan where at times it has been non-existent.
So when you see more open mouth operations today you now understand why….