Federal Reserve chief Jerome Powell said today that the gloves are off in the Fed’s fight against inflation:
He’s talking the talk. As for walking the walk … well … not so much. Tough words about inflation fighting resolve, hiking in bigger 50 bp steps, doing what it takes, bla bla bla.
Meanwhile there’s utterly nothing standing in the way of higher rates now. Instead of calling a phone conference and announcing a rate hike, Powell chose to make a speech about hiking rates. The Fed funds target today is a mere 0.25%-0.50%.
Why not higher sooner? The Fed only likes decisive action when it comes to cutting rates. It prefers to move glacially, in baby steps, when it comes to hiking. It’s mantra for years was lower for longer. It could have given itself the space to move in nice little quarter point increments – by getting started a year or so ago – but it didn’t. Its canon doesn’t allow rates higher than zero as long as QE is going on … just don’t ask why.
It looks for all the world to me that Powell is just afraid to raise rates. But I think he’s getting nervous about the bond market and hopes that talk will pinch hit for action. Treasury prices have been plunging on inflation and the market is looking for reassurance the Fed will act. But time is not on Powell’s side. He’s trying to buy some with words, but so far the bond market remains unconvinced and is forging ahead, hiking on its own.
That the Fed is being led as opposed to leading is clear from the yield curve. Yields are in a relatively shallow upslope from a year or so on out, but the curve from the front up into that area is very steep. From two years to twenty there are only 53 basis points; from one month to just two years there are 192. This indicates yields at the very short end are as low as they are only because the Fed is sitting on them. It’s not leading … it’s being dragged kicking and screaming into raising rates.
Is this a Fed that really has its heart set on beating inflation? Or one that wants to talk on stage about starving inflation while continuing to feed it behind the curtain?
My point is not necessarily that it’s the latter, but that the Fed has gone off the deep end in terms of obsession with future policy moves at the expense of the present. Let’s assume for example that the coronavirus outbreak in February of 2020 altered the appropriate short rate for March. Or that the outbreak of war two years later did the same. In either case the appropriate rate for March was not and could not have been known in January. Important March inflation data aren’t even known in February. Yet here we are in March 2022 obsessing over the appropriate rate for May, June, July … while completely brushing aside the fact that the rate in March 2022 is utterly inappropriate for March 2022.
This is just really bad monetary policy leadership.