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Fed Watch: Rate Hike Shock And Awe Won’t Work If Investors Are Expecting It

Published 31/01/2022, 11:49
Updated 02/09/2020, 07:05

Talk of the Federal Reserve opting for “shock and awe” when it starts to raise rates in March has grown so common that the half-percentage point hike being openly discussed would neither shock nor awe investors.

Raphael Bostic, head of the Atlanta Fed, joined the chorus last week when he said in an interview with the Financial Times that economic data might force policymakers to be more aggressive and put that half-point hike on the table.

“Every option is on the table for every meeting. If the data say that things have evolved in a way that a 50-basis point move is required or [would] be appropriate, then I’m going to lean into that.”

Bostic added that being more aggressive could also mean more quarter-point hikes than the three he is predicting in his baseline forecast.

Five Instead Of Three?

At some point, investors will start to think there is something behind this telegraphing of the possibility of more aggressive action. Market data now indicates a possible five hikes this year in the normal quarter-point increments. A half-point increase to start it off would show the Fed is serious and possibly forestall increased action later.

Fed Chairman Jerome Powell followed through on widely expected measures in his announcements after last week’s meeting of the Federal Open Market Committee. Asset purchases will end in March, an interest-rate hike is imminent, and the Fed will begin running off its bond portfolio sometime after that under a clear set of principles.

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There is no shortage of those claiming the Fed is behind the curve. Mohamed El-Erian seems to be vying with former Treasury Secretary Larry Summers to be the biggest critic of the Fed’s monetary policy.

In a Bloomberg column last week, the former chief executive of Pimco commented on the remarks from Fed Chairman Jerome Powell that an interest-rate hike would come in March, followed by other measures to make monetary policy less accommodative:

“The Fed delivered what I expected but not what I think is needed for sustainable economic well-being. It should have stopped purchasing assets immediately and given a clearer signal on rate increases. Instead, the central bank doubled down on its 2021 trade-off of trying to please financial markets at the cost of increasing the challenges ahead for the economy, sound policy making and its own credibility.”

The core personal consumption expenditures price index reading on inflation—the one the Fed likes to watch even though it excludes the food and energy costs most keenly felt by the public—came in Friday at 4.9% on the year for December, the highest level since 1983.

This is one of the data points fueling increased buzz about a bigger rate hike. Separate data showed that civilian labor costs in December increased 4% over the past 12 months, the biggest increase in the 20 years of tracking that indicator. Economists believe that higher wage costs can drive up prices and create a spiral that heightens inflation expectations.

As the Fed wrestles with this problem, the Senate Banking Committee next week will hear testimony from nominees to the Federal Reserve board of governors. Conservative columnist George Will criticized two of the nominations in a Washington Post commentary headlined “Biden proposes saddling an already struggling Federal Reserve with two political activists.”

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Will criticizes Michigan State University professor Lisa Cook for being focused on things other than what the Fed does. Her “peer-reviewed academic writings pertinent to monetary policy are, to be polite, thin,” he remarked. As to the White House touting her being on the board of the Chicago Fed, Will notes her appointment to that board came two weeks before her nomination as governor.

Will’s beef with Sarah Bloom Raskin, who will testify for her nomination to be Fed vice chair for regulation, is that she is an outspoken activist for fighting climate change by denying capital to fossil fuel companies. “The Senate should tell both to express their abundant political passions through more suitable institutions,” Will said.

This columnist castigates the Fed for mission creep—trying to distract from its failure to fulfill its main function by expanding its mission.

The Fed, in short, is being sucked into the vortex of polarization that is plaguing Washington. Far from being the independent guardian of a stable economy, the US central bank is becoming increasingly politicized. It seems Powell dragging his feet on inflation while he waited on his renomination as chairman was only the beginning.

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