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Why Does Anyone Have Faith in Fed Rate Hike and Inflation Expectations?

It's a mystery to me why anyone believes the Fed.
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Rate hike projections chart courtesy of the Fed.

Rate hike projections chart courtesy of the Fed.

Fed Track Record

  • The Fed has a proven track record of terrible projections of inflation, first overestimating then dramatically underestimating.
  • The Fed has never projected a recession in real time.
  • Former Fed Chair Ben Bernanke could not even see the Great Recession even after it started.
  • Former Fed Chair Alan Greenspan warned or irrational exuberance in 1997 then in 2000 believed in the DotCom productivity miracle.

Restoring Price Stability 

Let's tune into Excuses, believable, and highly questionable statements by Fed Chair Jerome Powell in his speech today on Restoring Price Stability.

Believable Statements

  • No one expects that bringing about a soft landing will be straightforward in the current context—very little is straightforward in the current context. 
  •  And monetary policy is often said to be a blunt instrument, not capable of surgical precision. 

Monetary policy is often said to be a blunt instrument for one simple reason: It is a blunt instrument. 

Powell's statement is believable because it's true. Yet, Powell stated it in a way as if it's debatable.

Highly Questionable at Best

Powell: My main message today is that, as the outlook evolves, we will adjust policy as needed in order to ensure a return to price stability with a strong job market. 

Mish: The Fed would not recognize price stability it if jumped up and spit grapefruit juice in Powell's eyes. The Fed does not ever consider obvious housing and stock market bubbles, and somehow it defines a two percent exponential growth in the prices it does measure as "stable". 

Powell: If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so.  And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well.

Mish: This comes from Powell who ignored raging inflation for a year and nonetheless kept QE going right though March.

Powell: Our monetary policy framework, as embodied in our Statement on Longer-Run Goals and Monetary Policy Strategy, emphasizes that having longer-term inflation expectations anchored at our longer-run objective of 2 percent helps us achieve both our dual-mandate objectives. The risk is rising that an extended period of high inflation could push longer-term expectations uncomfortably higher, which underscores the need for the Committee to move expeditiously.

Mish: There is nothing in the mandate that requires or even mentions a 2 percent exponential trend as an objective. The entire notion of inflation expectations is absurd. Amusingly, a Fed study proves just that.

Powell: It is worth noting that today the economy is very strong and is well positioned to handle tighter monetary policy.

Mish: The Fed has a negative track record when it makes statements like the above. Powell sounds like Bernanke who denied a recession and said housing problems were "well contained"

Yet, Some Believe the Fed

By Steepening Fed Guy, Joseph Wang means the Fed will force up the long end of the yield curve to crush rent prices.

But forcing up long rates would undoubtedly crush housing and might not do a damn thing to the price of rent.

A new home is an inelastic item but new homes are an elastic item where the Fed can make a blunt impact.

The Great Steepening

Here is Fed Guy, Joseph Wang's Great Steepening thesis.

Chair Powell suggested at his March press conference that QT would begin in May and look like the prior QT, which began with a ramp up and ended with a ramp down. The Fed’s maturity profile for Treasury coupons is front loaded and for Agency MBS is an estimated $25b a month pace. An aggregate cap that begins at $50b and ramps up to $80b would achieve $3t in QT in around 3 years. The Fed’s Treasury bill holdings are not strictly part of a QE program and may be managed separately. Note that Agency MBS prepayments are expected to be very low in the coming years as borrowers have less incentive to refinance. This may argue for a steady non-binding cap on Agency MBS reinvestments with some outright sales in the third year.

Balance Sheet Discussion 

This is what Powell actually stated in the Q&A after the March FOMC Meeting

Scroll to Continue


JEAN YUNG. Hi, Chair Powell. I wanted to ask about the balance sheet discussion you had at this meeting. Can you give us any more details? Did you discuss whether to cap runoffs and -- or whether to increase those caps over what period if there were any details? 

CHAIR POWELL. Yes. Thank you for asking. So, at our meeting today and yesterday, we made excellent progress toward agreeing on the parameters of a plan to shrink the balance sheet. And I'd say we're now in a position to finalize and implement that plan so that we're actually beginning runoff at a coming meeting. And that could come as soon as our next meeting in May. That's not a decision that we've made. But I would say that that's how that's how well our discussions went in the last two days. So a couple things just to add. We'll be mindful of the broader financial and economic contexts -- context when we make the decision on timing, and we always want to use our tools to support macroeconomic and financial stability. We want to avoid adding uncertainty to what's a highly uncertain situation already. So all of that will go into the thinking of the timing around this. In terms of the -- I would say this. I don't want to get too much into the details because we're literally just finalizing them. But the framework is going to look very familiar to people who are familiar with the last -- the last time we did this. But it'll be faster than the last time. And, of course, it's much sooner in a cycle than last time.  

Wang is focusing on "faster and much sooner". 

I point out that the Fed was expected to have a plan in March and didn't. 

Powell walked back a 50 basis point hike after it was already baked priced in.

And importantly Powell did not even commit to starting QT in May, stating "That's not a decision that we've made."

Ok it will be sooner. That's believable.

The Fed launched massive QE in 2008. It started QT in 2018, ten years later.

From a rate hike perspective the Fed hiked rates a quarter of a point in December 2015, and waited another year for the next quarter-point hike. 

It waited three more years to start QT.

So, yeah, "sooner" than three years is believable.

One of Us is Wrong

Another QT Proponent

These are guys I respect. We just see things dramatically different.

Was There a Pace Last Time?

Yes, after three years then very slowly.

What Can the Fed Do About the Price of Food, Medicine, Gasoline, or Rent?

The answer is nothing! The Fed can impact demand for houses and building houses. But rent? 

For discussion, please see What Can the Fed Do About the Price of Food, Medicine, Gasoline, or Rent?

Finally, please note A Fed Economist Concludes the Widely Believed Inflations Expectations Theory is Nonsense

Curiously, slowing the building of houses puts more not less pressure on rent prices!

This is all the more reason for baby steps.

This post originated at MishTalk.Com.

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