Fed hawks Waller and Bullard push back ‘behind the curve’ view By Reuters


© Reuters. FILE PHOTO: St. Louis Fed President James Bullard talks about the U.S. economy during an interview in New York February 26, 2015. REUTERS/Lucas Jackson


By Anne Sapphire

(Reuters) – Two of the Federal Reserve’s most vocal political hawks on Friday pushed back against the idea that the U.S. central bank had missed the mark in the fight against high inflation, citing a tightening in financial conditions that began long before the Fed won’t start raising interest rates in March.

“How far behind the curve could we have been in terms of timing if, using forward guidance, effective rate hikes from September 2021 were considered?” Fed Governor Christopher Waller said yields on two-year Treasuries rose last fall as the Fed began signaling the end of its ultra-easy policy.

The move reflects the equivalent of two Fed rate hikes through December, he said.

Speaking at the same Stanford University conference, titled “How Monetary Policy Lagged the Curve,” St. Louis Fed President James Bullard argued that the Fed n is “not as far behind the curve as you might think”.

Earlier this week, the Fed raised its key rate to a range of 0.75% to 1%. Critics say that’s far too low to fight inflation at three times the Fed’s 2% target.

Bullard said he agreed, calling inflation “far too high” and calling for a “rapid” hike in rates, up to perhaps 3.6%, to get inflation under control. But he noted that markets are already pricing in much of that increase.

Rate futures traders currently forecast a fed funds rate of 3% to 3.25% by the end of the year.

“It’s going in the right direction…hopefully we can get away from that characterization behind the curve soon,” Bullard said.

The two were among the first Fed policymakers last year to call for a quick removal of accommodative monetary policy and a faster start to interest rate hikes.

Bullard, in fact, opposed the Fed’s quarter-point rate hike in March, deeming it insufficient.

But both joined their colleagues in endorsing the half-point rate hike announced this week. Fed Chairman Jerome Powell, speaking after the rate decision was announced, announced further hikes to come, including half-point rate hikes in June and July.

Waller used his Friday speech to trace how the economic data appeared to first ratify, then challenge, his own view from last spring: that inflation would prove transitory as supply chains heal and the one-off fiscal stimulus would fade, and that the labor market was poised to roar as COVID-19 receded.

Most of his colleagues shared the first point of view; opinions were more divided on the second. In the end, Waller said, inflation turned out to be much higher and more persistent than he had expected.

At the same time, he described the ‘punch in the gut’ he was feeling as two weaker than expected monthly employment reports in August and September seemed to undermine the thesis of the labor market healing. .

As it turned out, subsequent data revisions showed that the US labor market had been stronger than the real-time data suggested.

“If we knew then what we know now, I think the (Fed) would have accelerated the taper and raised rates sooner,” Waller said. “But nobody knew that, and it’s in the nature of doing real-time monetary policy.”

By early November, most policymakers were of the view that high and rising inflation would not come down fast enough on its own, and that companies’ demand for workers far exceeded a sluggish labor supply. to straighten up.

“That’s when…the FOMC pivoted,” Waller said. The Federal Open Market Committee, known as the FOMC, is the governing body of the Fed.

The conference featured several former Fed policymakers and economists who argued that the Fed had fallen so far behind the curve that it would almost surely end up causing a recession as it sought to catch up by raising rates higher. rapidly.

Former Fed Vice Chairman of Oversight Randal Quarles, who says he was the Fed’s most hawkish member until Waller took over late last year, told the conference that in hindsight, it was clear “that it would have been better to start raising rates last September”.

It wasn’t a lack of nerves, politics or stupidity, he said on Friday. “It was a complicated situation with little precedent, and people make mistakes.”

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