GS writes of MORE hikes, QT and THEN Duds writes of Fed needing to get "...a lot more hawkish"
In today’s edition of which came first, the chick or the egg, on the heels of the weekend writeup by GS (Global Views: Earlier Runoff, Four Hikes), the former GS and FRBNY Bill Dudley out with a column in BBG today …
The Federal Reserve Needs to Get a Lot More Hawkish
It can’t remain in the fantasyland of its dovish forecasts indefinitely.
By Bill Dudley
January 10, 2022, 5:00 AM EST
I have news for those who think the U.S. Federal Reserve has turned more hawkish on inflation: It has only just begun.
True, the minutes from the Fed’s December policy-making meeting display growing concern. Officials are acknowledging that the labor market is already very tight, and that factors such as wage growth probably won’t be entirely transitory. They seem to be losing hope that more people will come off the sidelines to satisfy demand for workers. They’re looking increasingly likely to raise interest rates immediately after the Fed’s asset-purchase program ends in March — though there’s still the wildcard of how a resurgent pandemic will affect the economy…
… I see only a couple ways for this Alice-in-Wonderland fantasy to come true. First, today’s inflation could prove transitory, allowing the Fed to keep interest rates low — but this is inconsistent with the Fed’s own near-term analysis and hardly plausible when the ratio of unfilled jobs to unemployed persons is at an all-time high and wage growth is picking up markedly. Second, the neutral federal funds rate could be much lower than officials’ 2.5% median estimate, making the 2.1% rate projected for the end of 2024 much tighter – but there’s no evidence to support such a hypothesis, and indeed no Fed officials changed their estimate of the long-term neutral rate in December.
… How high might rates go? If inflation is running above the Fed’s 2% target, they must adjust both to compensate for higher inflation and to achieve tight monetary policy. So if inflation subsides to 2.5% to 3% as supply chain issues dissipate, then a federal funds rate peak in the 3%-to-4% range seems reasonable.
This concludes today’s edition of which comes first. Current policy makers or future policy makers but one thing is clear. There’s absolutely NO worries anything can possibly go wrong. For THAT you’ll need to read MSs Sunday Start (via ZH) who put it as clearly as possible,
… Indeed, it would seem for the moment that central banks are increasingly comfortable pushing a more hawkish line until something pushes back. And so far, nothing has. Equity markets haven’t fallen, credit spreads are steady, and yield curves have steepened over the last month (the opposite of what you’d expect in a policy mistake). Why stop now?
Waiting for the BOOM (as well as HIMCOs latest missive … staying tuned) …