Running in circles
May 31, 2022
–A couple of clips from Waller’s speech on Monday:
No matter which measure is considered, however, headline inflation has come in above 4 percent for about a year and core inflation is not coming down enough to meet the Fed’s target anytime soon. Inflation this high affects everyone but is especially painful for lower- and middle-income households that spend a large share of their income on shelter, groceries, gasoline, and other necessities. It is the FOMC’s job to meet our price stability mandate and get inflation down, and we are determined to do so.
I support tightening policy by another 50 basis points for several meetings. In particular, I am not taking 50 basis-point hikes off the table until I see inflation coming down closer to our 2 percent target. And, by the end of this year, I support having the policy rate at a level above neutral so that it is reducing demand for products and labor, bringing it more in line with supply and thus helping rein in inflation.
My plan for rate hikes is roughly in line with the expectations of financial markets. As seen in slide 1, federal funds futures are pricing in roughly 50 basis point hikes at the FOMC’s next two meetings and expecting the year-end policy rate to be around 2.65 percent.
https://www.federalreserve.gov/newsevents/speech/waller20220530a.htm
–Fed officials, and Waller is no exception, talk about inflation as if all prices and wages rise and fall together. That’s stupid. The hand-wringing about the lower income households feeling the most pain is true…primarily because of energy and food costs. Stifling demand for other goods, and thus labor and wages doesn’t mean that energy and food costs will come down. In other words, the Fed may accomplish ACCENTUATING the pain on the lower-income segment of the population. Look, if 2.65% is neutral (and right now it’s nowhere close to neutral) then food and energy would already be coming down, because SFRZ2 at 9732.5 is already at 2.675. But WTI and beans are both making new highs. Get a mitt.
–When all else fails, trot out the models. Which is what Waller does at the end of the piece in an attempt to show that the Fed won’t harm labor markets. “…REDUCING DEMAND FOR PRODUCTS AND LABOR” right from the speech. So, inflation crushes lower income segment, food and energy are the biggest culprits, and now Biden is having Powell over at the WH for a discussion, while the administration is blocking domestic US energy production. It’s all a bit circular… July WTI (CLN2) at a new contract high above 119 this morning. Maybe the answer is to drain the SPR and cancel student debt.
