A feature of 2022 is the way that central bankers are trying to make up for lost time in the battle against inflation. Actually as we stand it is mostly a case of open mouth operations as whilst they dithered the inflation genie was already beginning to party and is now having second-order effects as it spreads to more areas. This is a clear failure of the idea of independent central banks who were supposed to be able to take the difficult decisions the politicians ducked, but have ducked them also. So we are seeing a period where central bankers are ramping up their rhetoric in the sort of manner a politician would.
The leader of the pack is the US Federal Reserve. Let me give you an example from Charles Evans of the Chicage Fed who said this, rather appropriately, on April 1st.
Inflation for the year was an uncomfortably high 5.8 percent and rose further to 6.4 percent in February.1 For people whose incomes have not kept pace, higher inflation is a real hardship.
You may note that he has picked the lowest number that he can for inflation and I wonder who he thinks has an income that has kept pace with even this? Not many I would suggest. But the real issue is what the Fed has done in response.
A few weeks ago, the FOMC announced its decision to raise the federal funds rate target by 25 basis points to a range of 1/4 to 1/2 percent.
So even on his inflation measure around 6% below the inflation rate. Thus he said this in an attempt to smooth things over.
Our recent 25 basis point rate hike was the first of what appears to be many this year.
But yesterday he seemed to be slip-sliding away again.
Evans said: “I’m optimistic that we can get to neutral, look around, and find that we’re not necessarily that far from where we need to go.” ( Reuters)
For those unaware this was estimated at 3% but looking at developments may now be more like 2.5%. It is revealing that Charles Evans picks a neutral rate that he can define. Perhaps he has forgotten his own words from back in 2011.
Imagine that inflation was running at 5% against our inflation objective of 2%. Is there a doubt that any central banker worth their salt would be reacting strongly to fight this high inflation rate? No, there isn’t any doubt. They would be acting as if their hair was on fire.
Is a 0.5% interest-rate an example of him acting as if his hair was on fire?
If there is a man from Mars as sung about by Blondie he would be rather bemused as to how interest-rates were a mere 0.5% on reading this.
all participants concurred that the U.S. economy was very strong, with an extremely tight labor market, and that inflation was high and well above the Committee’s 2 percent inflation objective.
He would have expected to see a sequence of interest-rate rises as every condition for one is met by that statement. Except we have only seen one. This is because the Federal Reserve was on Team Transitory for inflation meaning that it has had to leep doing this.
The staff’s near-term projection for PCE price inflation
was revised up considerably relative to January…….In
addition, total PCE price inflation was further revised up
to reflect higher expected paths for consumer energy
and food prices. All told, total PCE price inflation was
projected to be 4 percent in 2022.
Indeed it is not only inflation where they want to rewrite history.
Many participants noted that—with inflation well above
the Committee’s objective, inflationary risks to the upside, and the federal funds rate well below participants’
estimates of its longer-run level—they would have preferred a 50 basis point increase in the target range for the
federal funds rate at this meeting.
Has nobody told them that history is written by the winners and not the losers? Anyway our ditherers now claim that they are on the case.
Many participants noted that one or more 50 basis point increases in the target range could be appropriate at future meetings, particularly if inflation pressures remained elevated or intensified.
We can now move to Vice- Chair Brainard whose views have been summarised as follows.
The ‘accuracy’ of #FederalReserve Vice Chair Lael Brainard:
Jul 2020: supported letting inflation run hot (exceed 2% target)
Apr 2021: Inflation expectations are “extremely well anchored”
Sep 2021: “I expect inflation to decelerate”
Today: “Inflation is much too high” ( @menlobear )
Some Comedy Gold
Markets have picked on the words of James Bullard of the St.Louis Fed.
“The difference between today and the 1970s is central bankers have a lot more credibility,”
That really is incredible and I am not sure if it is worse whether he actually believes that or not? But according to CNBC he warmed to his theme.
“In the ’70s, no one believed the Fed would do anything about inflation. It was kind of a chaotic era. You really needed (former Fed Chair Paul) Volcker to come in … . He slayed the inflation dragon and established credibility. After that, people believed the central bank would bring inflation under control.”
This really is the economics equivalent of Comical Ali assuring us there were no US tanks in Baghdad.
What does he suggest for policy?
Bullard, a voting member on the FOMC this year, said Thursday that “inflation is too high” and the Fed needs to act. In projections released in March, Bullard called for the highest rates among his committee peers. He has said he wants to see 100 basis points’ worth of hikes by June. The benchmark fed funds rate now is in a range targeted between 0.25%-0.5%. ( CNBC)
This is rather awkward on two counts. Firstly there is the simple maths of people who want to in an apparent rush raise interest-rates by 1% after only doing so by 0.25%. It is a bit like a football manager of a team who rarely scores predicting a sudden goal rush. Next comes the fact that his views on credibility are so incredible he has made himself look like a fantasist.
I wanted to address this issue because in my opinion financial markets have become the lap dogs of the central bankers. Some are even forecasting interest-rate rises from the European Central Bank! Societe Generale forecast a 0.25% rise this September and the same in December. So the ECB will boldly go to a 0% interest-rate in 2023. But my counterargument is more subtle. So far they have done nothing and kept a negative interest-rate of -0.5% in the face of inflation news of which the one below is the latest.
The HICP in March 2022 compared with March 2021 increased by 8.0%………. The HICP in March 2022 compared with February 2022 increased by 2.7%.
If they have done nothing in the face of inflation rises such that Greece for example is seeing quadruple the supposed target rate what happens if inflation is still high later in the year but slightly lower than now? I fear that they will use it as an excuse to do nothing.
So more specifically inflation has to stay around these levels or the risk is that the open mouth operations melt like a snowman in the sun.