Could they be the canaries in the coal mine?
Two members of the Federal Reserve board of governors who are rarely heard from, Michelle Bowman and Christopher Waller are leaning toward a half-point increase in the fed funds overnight rate, countering policymakers who had previously tried to tamp down expectations of anything higher than the standard quarter-point.
Michelle Bowman, a former Kansas banking commissioner who in 2018 became the first person to fill the small-bank seat on the board mandated in 2015, hardly ever talks about monetary policy. But last Monday she said she is open to a half-point increase if data warrants it.
"I intend to support prompt and decisive action to lower inflation," she said at an American Bankers Association community banking conference in California. Bowman got her seat because her family owns the Farmers and Drovers Bank in Council Grove, Kansas, and she worked there as a vice president.
Governors are permanent voting members in the Federal Open Market Committee, so whether she talks about it in public or not, Bowman is one of the nine policymakers entitled to vote on monetary policy.
Then on Thursday, another board member, Christopher Waller, dutifully followed the lead of his former boss, St. Louis Fed chief James Bullard, in calling for a full percentage hike in the Fed rate by midyear. Until he joined the board in late 2020, Waller was chief economist at the St. Louis regional bank.
"We constantly say we have the tools to fight inflation, and now we must demonstrate the will to use them."
Waller said at an event at the University of California in Santa Barbara. Fed Chairman Jerome Powell, in particular, is fond of reassuring the public that the central bank knows how to fight inflation.
Waller has not made a lot of speeches as the newest member on the board but could be hitting his stride. In California, he said he would support a half-percentage increase in March if inflation continues to increase.
The inflation measure Fed policymakers pay the most attention to—the core personal consumption expenditures index—came in Friday at a roaring 5.2% increase on the year for January, after 4.9% in December. The increase was 6.1% if you include the volatile food and energy prices that consumers pay the most attention to. It was the highest reading for the index since 1983 and 1982, respectively.
The unknown factor in Fed deliberations at the FOMC meeting Mar. 15-16 is what will happen in Ukraine after Russian President Vladimir Putin has unleashed the full force of his military in a multi-pronged assault from land, sea, and air. The Ukrainian forces, often supplemented by citizens bearing arms, have put up more resistance than expected, but an eventual partition of Ukraine and a puppet government in Kyiv seem likely.
The aggressiveness of Putin’s attack has spurred Western countries to adopt the powerful sanction of removing some big Russian banks from the SWIFT payments network, which could cripple the country’s economy. It could also require the Fed to take emergency measures to make dollars available to banks due to disruptions in international payments.
Conflict Unlikely To Deter Fed Plans
At the same time, the potential interruption of Russian oil and gas, fears of which immediately drove benchmark prices of oil above $100 a barrel, will further exacerbate inflation and may increase the need for the Fed to act decisively.
Cleveland Fed chief Loretta Mester, a voting member of the FOMC this year, said on Thursday that it will still be appropriate to start raising rates in March and keep it up in the following months. Speaking via videoconference at a University of Delaware event, Mester said:
“The implications of the unfolding situation in Ukraine for the medium-run economic outlook in the U.S. will also be a consideration in determining the appropriate pace at which to remove accommodation."
Other regional bank heads also confirmed last week that the Ukraine situation is not likely to deter the Fed from its plan to raise rates in March. However, some economists cautioned that Russia’s action marks a change in the postwar order that could have far-reaching implications. At the moment, though, it seems inflation trumps other considerations.