It seems a game of one-upmanship has emerged among the US punditry since Federal Reserve chair Jay Powell ramped up his rhetoric on Monday, vowing to act “expeditiously” in lifting rates and saying that he wouldn’t hesitate to go bigger than 0.25%.
That has triggered a Pavlovian response among money market economists and stockmarket economists about who could make the toughest call about the number and size of rate rises over this year and next.
Then Fed members weighed in so that by Tuesday night there was almost a schoolyard “mine is bigger than yours” twang to the debate.
“The Fed needs to move aggressively to keep inflation under control,” St. Louis Fed President James Bullard told Bloomberg TV on Tuesday, calling for the central bank to raise its benchmark overnight interest rate to 3% this year.
That could see ordinary mortgages up around 6% or more.
Bullard dissented at last week’s Fed meeting, wanting a half a per cent hike as the rest of his colleagues agreed to raise the federal funds rate by 0.25% from the record low near-zero level it had been since March 2020.
“Faster is better,” he said Tuesday, and that view now appears to be gaining traction among his peers.
Before Bullard’s bigger is better comments, noted moderate Cleveland Fed President Loretta Mester told a conference on Tuesday that bigger rate rises will probably be needed at “some” of the remaining six Fed meetings this year.
She at least made her remarks while noting the continuing impact of supply chain problems on prices as well as supporting Powell’s concerns that Russia’s Ukraine war will further boost the already too-high level of inflation.
“I find it appealing to front-load some of the needed increases earlier rather than later in the process because it puts policy in a better position to adjust if the economy evolves differently than expected,” she said.
By year end, Mester said, rates should be about 2.5%, and rates need to rise further next year to bring inflation down. Again, no mention of what that would do to business of mortgage rates.
And San Francisco Fed President Mary Daly (who is classed as being among the more dovish of Fed members) told a virtual conference that she wants to see rates higher, to a neutral level and perhaps above, to prevent high inflation from getting embedded.
While she wasn’t asked about a 0.5% rise her comments were not supportive of a graduated step by step 0.25% rate rise.
The comments saw a flood of money in interest rate futures markets for a half a per cent rise in May and June from the Fed and a federal funds rate (the key Fed interest rate) rising to the 2.25%-2.5% range by the end of the year – substantially higher than the 1.9% suggested by Fed forecasts last week.
Chairman Powell had argued on Monday that the US economy is strong enough to withstand higher borrowing costs without damaging the current strong employment growth and argued the best thing the Fed could do to ensure continued labor market strength is to get inflation under control.
Reuters pointed out how Powell’s language when describing the pace of interest rates has changed before last week’s Fed meeting, in his post meeting comments and Monday – there has been a conscious hardening.
Ahead of last week’s meeting and rate rise, Powell had said the Fed would proceed “carefully” due to high uncertainty about the impact on the US economy of the Russian invasion of Ukraine.
In his news conference after the rate rise, Powell said the Fed must be “nimble” in responding to the evolving outlook.
On Monday he was talking about how the Fed had to move ‘expeditiously’ in moving on rates and there was less concern expressed about the impact of rate rises on growth and jobs – the primary concern is too high inflation.
The new belief about jobs seems to be captured by Mester when she said on Tuesday she is “very optimistic” that the Fed can reduce excess demand for workers without reducing economic activity or jobs.
That’s going to be a big ask.
