Investors have at times in the past complained about the cacophony of opinion expressed by Federal Reserve policymakers, longing for the olden days when a dominant chairman like Alan Greenspan was the sole voice worth listening to.
Be careful what you wish for. All members of the Federal Open Market Committee have been talking a lot since then, but now they’re all saying the same thing and there is growing skepticism they are telling the whole truth.
Many Voices, One Imperative...But Is It True?
Whether it’s a hawkish Boston Fed chief Eric Rosengren or a dovish San Francisco Fed President Mary Daly, the message is largely the same: Don’t worry, be happy.
“I think we’re two years away from when that likely is going to become a much more important question,” Rosengren said in an interview last week when asked about the timing of rate increases.
“We still have a lot of labor market slack, the participation rate is still quite low relative to prior to the pandemic, and the unemployment rate is still at 6%. So we need to get rid of the slack, have a sustained inflation rate, before we need to worry about raising rates.”
Daly similarly said the Fed is holding out for a much higher labor force participation rate and a consistently high inflation rate. When asked when this might happen, she said:
“Not for a while. We have to get to full employment first. We get the unemployment rate to what it was before, and get all of those workers who left the labor force—and particularly, women were doing this to take care of their children—back into the labor force before we can declare victory.”
The Fed has been working hard to boost inflation and it’s not about to abandon that effort. “We always have the tools to pull inflation down if it gets too high,” Daly said. “I see a temporary rise in inflation; it comes back down. I’m much more worried about regaining full employment and lifting inflation up to our 2% average inflation target.”
New York Fed President John Williams said the same thing in a discussion with students at New Jersey’s Rutgers University. “We know how to deal with inflation,” he said, adding that he expects price increases to stay near the Fed’s 2% target.
In general, Fed officials seem keen on projecting the image that they are firmly in control. New York Fed Executive Vice President Lorrie Logan, who manages open market operations for the system, said the central bank has a firm grip on short-term rates through its overnight repurchase agreements.
Policymakers agreed in March to raise the limit for each counterparty to $80 billion from $30 billion, creating more room in that facility, and Logan said the Fed is ready to make technical adjustments as needed to keep rates where they want them.
Fed Chairman Jerome Powell meanwhile said that when at some point in the future the Fed wants to wind down its monthly asset purchases—currently at $120 billion—it will follow the pattern established in 2013 and 2014 when it tapered purchases in the wake of the financial crisis.
The Fed will slow down its purchases but will probably not sell any bonds and will continue to reinvest principal as it matures, at least for a while. This will come well ahead of any rate increases and none of this will start for some time, he suggested—only with “substantial further progress” on reaching employment and inflation goals.
But some people aren’t so sure the Fed is on top of things. Odeon Capital strategist Dick Bove told Maria Bartiromo on Fox Business News that he thinks the Fed has lost control of the money supply. “The Fed is out of control,” he said. “It’s printing money like wild men.”
In somewhat more measured terms, The Economist editors said the Fed has to tell investors how it plans to handle inflation because its new policy of targeting average inflation remains vague and creates uncertainty.