Two hawkish policymakers at the Federal Reserve (Fed) agreed on Friday (6th) that the current monetary policy has not lagged behind the inflation situation, and the forward guidance has played a significant role.
The annual growth rate of the US consumer price index (CPI) in March reached 8.5%, which is the hottest inflation in 40 years. The Fed has been criticized many times for its backward policy response.
St. Louis Fed President James Bullard and Fed Governor Christopher Waller, both hawks on the Federal Open Market Committee (FOMC), at an event at the Hoover Institution at Stanford University , defended once morest criticism from attendees that the Fed was moving too slowly.
The pair argued that critics did not take into account the tightening of financial conditions ahead of the Fed’s March rate hike.
Bullard said: “Reliable forward guidance means that market interest rates have risen significantly long before the Fed takes action.” In this sense, the Fed is not far behind the situation.
Waller made a similar point, saying the Fed’s rhetoric led financial markets to start betting on rate hikes last September, which he predicted would drive two-year yields up by the equivalent of a 2-yard rate hike by the Fed.
“From this perspective, if forward guidance is used to say that there has been a real rate hike from September 2021. How far might we be behind the situation?”
The Fed actually raised interest rates for the first time in March this year, and raised interest rates by 2 yards in May, the largest increase in 22 years. Chairman Powell has said that in June and July, it may increase by 2 yards each. The Fed also began shrinking its massive balance sheet in June, shrinking by $47.5 billion in the first three months and by $95 billion a month following September.
Under the May resolution, officials want to raise interest rates to a neutral level of regarding 2.5 percent, and possibly even higher if inflation persists.
Financial markets have been volatile this week, surging more than 900 points on Wednesday following Powell said he was “not actively considering a three-yard move”, but gave up all gains on Thursday. Among the policymakers, Bullard has publicly stated that “the possibility of a rate hike of 3 yards at a time cannot be ruled out”, but he supported a rate hike of 2 yards at a meeting in May.
Richmond Fed President Thomas Barkin still isn’t ruling out a three-yard rate hike, saying on Friday: “I’ve never ruled out anything, there should be options on the table.”
Even the most dovish official on the policy spectrum, Minneapolis Fed President Neel Kashkari said on Friday that unless supply chain pressures push prices up, interest rates may have to rise to beyond the neutral level. Neither Bajin nor Kashkari have the right to vote this year.
