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

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

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.

Thanks for Tuning In!

Please Subscribe to MishTalk Email Alerts.

Subscribers get an email alert of each post as they happen. Read the ones you like and you can unsubscribe at any time.

If you have subscribed and do not get email alerts, please check your spam folder.

Mish

Subscribe to MishTalk Email Alerts.

Subscribers get an email alert of each post as they happen. Read the ones you like and you can unsubscribe at any time.

This post originated on MishTalk.Com

Thanks for Tuning In!

Mish

Subscribe
Notify of
guest

19 Comments
Newest
Oldest Most Voted
Inline Feedbacks
View all comments
CRS65
CRS65
2 years ago
One cannot presume that we are anything close to normal times where one can look back to a previous period of time for guidance on how inflation will react to both supply chain healing and tighter monetary policy. I am a big believer that high prices are the best cure for high prices. That being said, the Fed needs to get short-term rates back to “neutral.” The question is what is neutral? This is where inflation expectations comes into play. If inflation expectations over the next three years are between 2.75% and 3.25%, a Fed Funds rate would be around 3% and that would likely translate into a ten year Treasury rate in the 3.50% – 4.00% range depending on the trajectory of the economy at the time. The Fed does not need to get to 3.00% overnight, it can take the next 12-18 months to get there in my opinion because high prices and lack of additional QE combined with higher second half of 2021 inflation comparisons should begin a trend of lower inflation.
RonJ
RonJ
2 years ago
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.”
Powell doesn’t want price stability, he wants a minimum 2% inflation.
Mike 2112
Mike 2112
2 years ago
What kind of weapon is better, a strong weapon or a weak weapon?
A strong weapon.
So if DC is using the dollar as a weapon via sanctions and SWIFT then what kind of dollar will they need?
Jackula
Jackula
2 years ago
Not I, we are gonna have a helluva financial mess come summer. A housing report from the great state of Idaho. Real Estate may be rolling over hard in some of the uber hot areas. Asking 900k, best offer so far 725k. Woulda sold in one day with multiple offers over asking 1.5 months ago. 3 weeks in.
vanderlyn
vanderlyn
2 years ago
for fear of repeating myself too much, the fed has only one mandate. to keep her owners, the bankers, in high cotton. all the jaw boning by fed and fed watchers is pure theatre. i admit, i enjoy great drama, so i’m not complaining. but let’s just remember it’s staged and pure acting. if you don’t know it’s drama and think it’s reality, i kind of have to chuckle as i have for decades. just get a grip and a history book, of what fed was put into existence for. after panic of 1907. you have a great blog mish. i enjoy the fed watching drama immensely. i personally smell the bubble of all bubbles slowly deflating like an old helium balloon from childhood that took long time, to sink to floor after coming home from a street carnival.
BowserB46
BowserB46
2 years ago
Reply to  vanderlyn
The Fed came into existence after the panic of 1907…and look how well it prevented a crash in 1929 and ten years of depression. Then it absolutely stopped the inflation of the 1970’s while preventing the cure from becoming stagflation followed by a crash in oil and real estate.
See? You guys are being to hard on the Fed. Yes, it’s done more damage to America than the Mafia, the FBI, and the Patriot Act combined, but hey, it’s name is on all our printed money, so it must be good.
Do I need a sarcasm emoji here?
Fish1
Fish1
2 years ago
Intently listening to this evening’s news feed and I am shocked at the calmness of the markets. The largest war in Europe in 75 years is ragging, with millions of refugees and thousands dead. Massive shortages of basic food items due either directly to the war but also knock-on geopolitical hindrances. I heard the possibility of of WW3 several more times this evening which is a threat that has not been whispered in 60 years. Massive energy shortages in the affected areas of Europe. Inflation clearly raging domestically which we have not seen in this country in more than 40 years. Housing prices now sprinting to levels never imagined possible. All this, yet Jim Cramer is still belting out his stock de jur buying advise. Bernanke, Greenspan, Hank Paulson all seem like precient Oracles compared to today’s counsel.
vanderlyn
vanderlyn
2 years ago
Reply to  Fish1
the war in ukraine has been waging since 2014 bombing of eastern provinces. this seems more like a capture of russian speaking and russian identifying regions. i don’t think it’s world war. i don’t think russians and putin are japan, italy and germany on the war path world wide. of course i always assume i’m wrong, so don’t shoot me if i am. pardon the gallows pun. dad and all uncles fought in ww2. putin ain’t marching on paris or berlin…………china ain’t invading japan or bombing honolulu. i unplugged my idiot box in 1980s. best thing ever. horrible way to acquire knowledge. but a great propaganda platform. not good for the nerves either. i eschew snuff films and watching people getting killed on film, in real life and fiction, too.
TexasTim65
TexasTim65
2 years ago
Reply to  vanderlyn
There is the physical war in Ukraine and then there is the economic war that the US and Europe is waging against Russia. That economic war is MUCH more wide spread than the physical war and tonight Biden has started sanctioning Chinese over human rights issues in order to get them to bend the knee on the Russia issue.
This economic war could spiral out of control WAY faster than the real war in Ukraine and it would have a lot bigger repercussions if things get really going with China…
vanderlyn
vanderlyn
2 years ago
Reply to  TexasTim65
russia also sent troops into kazakstan
BowserB46
BowserB46
2 years ago
Reply to  Fish1
Jim Cramer? I thought he was retired to Fiji after collecting a commission on every bad trade he suggested in the 1980’s!
JeffD
JeffD
2 years ago
They are trying to prevent society at large from panicking, with full knowledge the game is over. They are trying to tamp down the rate of hyperinflation. Smart people have been panicking since about 18 months ago when they realized what was happening.
Carl_R
Carl_R
2 years ago
It’s not a question of believing or not believing that they will do what they say. I do believe that if the economy does what they expect, continue to grow, with no recession, and with inflation falling to 4% by the end of the year, they will do exactly what they project, which is a long, slow, steady tightening. The problem is that I don’t believe that’s what the economy will do, so I think they will have to come up with a new plan, and their old plan will go by the wayside.
Lisa_Hooker
Lisa_Hooker
2 years ago
Reply to  Carl_R
“Everyone has a plan until they get punched in the face.” Tired, but true. But how many times does the Fed have to get punched in the face for it to register?
MPO45
MPO45
2 years ago
This post is worthy of a bookmark, we’ll come back to it a year from now. But “faith” is the wrong word. It is merely an expectation that something needs to be done and the only tool the fed has is the interest rate switch that goes up and down. Of course, jaw-boning works well too so technically there are two tools. I can’t wait for next year to roll around. I just can’t wait.
Scooot
Scooot
2 years ago
“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.“
We all know by the time they’d determined this it’d be too late.
JeffD
JeffD
2 years ago
Reply to  Scooot
Six months ago?
Lisa_Hooker
Lisa_Hooker
2 years ago
Reply to  Scooot
And if we determine that it is appropriate to create immense heaps of new money and force it into the financial system we will do that. Big glorious heaps. Piles of money larger than ever seen before. We’ve done it before and we can do it again.
Scooot
Scooot
2 years ago
Reply to  Lisa_Hooker
Yes but I don’t think so until the inflation genie is back in the bottle, too many votes at stake.

Stay Informed

Subscribe to MishTalk

You will receive all messages from this feed and they will be delivered by email.