\u2014 Rate Hike Sentiment Rising, But Most Inclined to Be Patient<\/p>\n
\u2014 Easing Bias Seems Increasingly Likely To Go<\/p>\n
(MaceNews) \u2013 Federal Reserve officials leaned half heartedly toward a potential tightening of monetary policy this week, as they struggled to keep up with the vicissitudes of the Iran conflict and its impact on energy markets and, prospectively, on the economy.<\/p>\n
Officials have given no indication they\u2019ll be ready to change rates at the June 16-17 meeting of the Fed\u2019s policymaking Federal Open Market Committee, Kevin Warsh\u2019s first as chairman. But their comments suggest it\u2019s quite possible the FOMC will abandon the easing bias it has had in its policy statement since December, thus setting the stage for a potential future shift to tightening.<\/p>\n
Officials such as Fed Governor Michael Barr and Cleveland Federal Reserve Bank President Beth Hammack have presented alternate scenarios in which the FOMC might conceivably want to either ease or tighten policy, with the letter increasingly seen, regrettably, as the most likely option.<\/p>\n
For now, officials see a third scenario \u2013 an indefinite stay at current rates \u2013 as appropriate. For how long depends primarily on whether inflation worsens or moderates.<\/p>\n
Officials have made clear they intend to look closely at the May employment report when it is released Friday morning to see how the Fed is doing on its \u201cmaximum employment\u201d mandate.<\/p>\n
But ahead of the report, past data have led most officials to see labor markets as relatively solid and unemployment historically low. Most recently, that view was seemingly vindicated by the ADP report that private payrolls grew by 122,000 in May.<\/p>\n
By contrast, there is no denying how the Fed is doing on the other side of its dual mandate. Inflation, as measured by the price index for personal consumption expenditures (PCE), rose 3.8% year-over-year in April (3.2% core), and has exceeded the Fed\u2019s 2% target for going on six years.<\/p>\n
So most officials see the \u201cbalance of risks\u201d as tilted decisively toward inflation. They simply aren\u2019t yet ready to act on that predisposition, holding out hope that inflation will subside as and when tariff and oil price effects wind down.<\/p>\n
Since its last rate cut on Dec. 10, the FOMC majority has taken the position that there can be no additional rate cuts until inflation decelerates unless labor markets weaken unexpectedly, and increasingly officials are talking about possibly needing to raise rates if labor markets remain sound.<\/p>\n
There had been some hope for a return of disinflation last week, when the U.S. and Iran seemed on the verge of a settlement that would end the conflict and reopen the Strait of Hormuz. Oil, which had gone as high as $126 per barrel, fell below $87, but this week oil rebounded by 10% as hopes for a cessation of Middle East hostilities diminished.<\/p>\n
As a result, policymakers find themselves in a prickly situation.<\/p>\n
Kansas City Fed President Jeff Schmid said Thursday it is important to get inflation back down to the Fed\u2019s 2% target, but said he and his Fed colleagues don\u2019t want to \u201cpush the economy into recession.\u201d He said they are asking whether they need to be \u201cpatient\u201d about raising rates.<\/p>\n
A cautious San Francisco Fed President Mary Daly said Thursday that the FOMC is \u201cprepared to respond either way\u201d to economic developments and expressed wariness about providing \u201cforward guidance\u201d that could end up \u201cmisguiding\u201d the public and markets.<\/p>\n
Richmond Fed President Tom Barkin repeated his belief Thursday that \u201cthe Fed is well positioned to respond as appropriate\u201d as the FOMC assess the economic impacts of the Middle East crisis.<\/p>\n
New York Federal Reserve Bank President John Williams, usually a reliable barometer of mainstream Fed thinking, defended the status quo Wednesday, saying \u201cMonetary policy is exactly in the right place. I don\u2019t see any need to raise or lower interest rates right now.\u201d<\/p>\n
But the FOMC vice chairman made clear the easing bias can\u2019t last much longer: \u201cI don\u2019t think forward guidance is particularly helpful right now in terms of trying to communicate monetary policy. I don\u2019t see an obvious argument that we should change interest rates, but I also don\u2019t see an obvious kind of direction where we would go in the future.\u201d<\/p>\n
Barr, who was also talking in terms of different policy scenarios Wednesday, said, \u201cWe\u2019re in a good place in terms of our policy right now to wait and see to actively monitor which of these paths we may be on.\u201d<\/p>\n
\u201cMy own view is it\u2019s likely to stay there for quite some time as we wait to see how this plays out,\u201d Barr said, but he added that in a scenario of continued inflation pressure, \u201cWe might actually have to raise rates.\u201d<\/p>\n
Dallas Fed President Lorie Logan sounded more inclined to tighten policy Wednesday, After pointing to \u201cstrong\u2019 economic activity and to low and \u201cstable\u201d labor markets, she said, \u201cThese conditions indicate that monetary policy is not restraining the economy. I am increasingly concerned that higher interest rates could be necessary later this year to fully restore price stability and appropriately balance both sides of the Fed\u2019s dual mandate.\u201d<\/p>\n
Hammack also leaned gently toward eventual tightening Tuesday. \u201cFor today, it\u2019s reasonable to keep rates steady given the uncertainties around the economic outlook,\u201d she said. \u201cBut if recent trends continue, it may soon be appropriate to act.\u201d<\/p>\n
The FOMC left the funds rate in a target range of 3.5% to 3.75% on April 29. But three Federal Reserve Bank Presidents (Hammack, Logan and Minneapolis Fed President Neel Kashkari) dissented in favor of removing from the policy statement this sentence: \u201cIn considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.\u201d That language, introduced when the FOMC last cut rates on Dec. 10, conveyed an easing bias.<\/p>\n
Minutes of the last FOMC meeting revealed that \u201cmany participants\u201d wanted to drop the easing bias. And they reported that \u201ca majority of participants highlighted \u2026. that some policy firming would likely become appropriate if inflation were to continue to run persistently above 2%.\u201d<\/p>\n
Officials this week were reluctant to go further and call outright for rate hikes in the near-term, but that contingency seemed to be a growing possibility on many officials\u2019 minds.<\/p>\n
Daly steered clear Thursday of saying where monetary policy is headed, but echoed others in saying it is in a good place for now.<\/p>\n
\u201cWe are prepared to respond either way, whatever the economy brings,\u201d Daly told a Bloomberg Tech conference in San Francisco.<\/p>\n
She implied the FOMC should drop its easing bias, saying, \u201cI think giving more forward guidance about what\u2019s possible could be misguiding in the end, because we just have to wait for the economy to evolve.\u201d<\/p>\n
Schmid, usually thought of as one of the more \u201chawkish\u201d Fed presidents, sounded more tentative Thursday in assessing what the FOMC ought to do.<\/p>\n
Asked about the biggest risk facing the economy, he replied, \u201cright now it\u2019s about inflation.\u201d<\/p>\n
Noting that inflation has been above target for over five years and that the Fed was having trouble getting it down to 2% even before the Iran war, he told an economic forum sponsored by his Bank in Hochatown, Oklahoma.<\/p>\n
But he said the Fed is trying to hit its inflation target \u201cwithout pushing the economy into recession.\u201d<\/p>\n
Schmid said Fed officials are asking themselves, \u201cDo we stay patient on rates?\u201d With inflation now above 3 \u00bd%, they are asking, \u201cis it temporary\u2026or do we act? Is now the time to raise rates a quarter or two and see if we can tamp this thing down..every month?\u201d<\/p>\n
\u201cThat\u2019s the nature of our discussion\u201d at every meeting, he said.<\/p>\n
Whatever the FOMC ultimately does with rates, Schmid said, \u201cWe want it to be a net positive for the American people (and) not do any harm unnecessarily.\u201d<\/p>\n
Williams said Wednesday that, monetary policy is \u201cexactly in the right place,\u201d with \u201c(no) need to raise or lower interest rates right now.\u201d<\/p>\n
But Williams spoke warily of inflation and inflation expectations on Yahoo Finance. While tariff and oil price increases should have \u201cmore of a one-time kind of effect,\u201d he said he is watching for signs that inflation is \u201cgetting more persistently embedded.\u201d<\/p>\n
\u201cI\u2019m not seeing that yet, but definitely there\u2019s a risk of that given how much of a kind of a boost to inflation we\u2019re seeing,\u201d he said.<\/p>\n
Williams went on to say that inflation risks have increased \u201csignificantly,\u201d while at the same time risks to employment have \u201cedged down.\u201d<\/p>\n
\u201cI don\u2019t think forward guidance is particularly helpful right now in terms of trying to communicate monetary policy,\u201d Williams said. \u201cI don\u2019t see an obvious argument that we should change interest rates, but I also don\u2019t see an obvious kind of direction where we would go in the future.\u201d<\/p>\n
Barr echoed Williams and others Wednesday in saying \u201cwe\u2019re in a good place in terms of our policy right now to wait and see to actively monitor which of these paths we may be on,\u201d and he said \u201c it\u2019s likely to stay there for quite some time as we wait to see how this plays out.\u201d<\/p>\n
But Barr warned that a scenario of persistently elevated inflation could force the FOMC to tighten policy.<\/p>\n
\u201cI think we\u2019re in a tough spot in the sense that these shocks \u2014 tariffs, and energy \u2014 have continued to put pressure on inflation, and if you look at the economy right now..we\u2019re not near the target we need to be, 2%, and in some measures we\u2019re drifting away form it with oil and tariffs,\u201d he told a Washington conference of the Community Development Bankers Association.<\/p>\n
\u201cWe want to be sure before take our next step,\u201d Barr said. \u201cIn one scenario..one time price effects, raise the level of prices but don\u2019t create inflation dynamics\u2026(then) should see inflation coming back down towards target.. (but) we haven\u2019t seen it yet\u2026if that\u2019s the case we can probably hold rates steady for awhile..as (price shocks) play through\u2026 eventually come to a place of cutting rates \u2026 . We\u2019re not there now.<\/p>\n
However, he said, \u201cIf you think of another path\u2026(where) shocks are bleeding through more broadly into the economy .. (Fed would) start to worry more about inflation\u2026. The risk, if we see that second scenario, is that we might actually have to raise rates.\u201d<\/p>\n
Logan, one of those who dissented against keeping the easing bias at the last FOMC meeting, was more hawkish than most in Wednesday remarks at The University of Texas at El Paso, as she focused far more on inflation and inflation expectations than on threats to the economy. .<\/p>\n
\u201cAbove-target inflation can become entrenched if it persists too long,\u201d she warned. \u201cInflation expectations would make it more costly to restore price stability. I am closely watching movements in market prices for short-term and long-term inflation compensation, as well as surveys of inflation expectations.\u201d<\/p>\n
Logan said \u201ceconomic activity remains strong\u201d and \u201cthe labor market appears stable and broadly balanced.\u201d What\u2019s more, \u201cFinancial conditions are accommodative.\u201d<\/p>\n
\u201cThese conditions indicate that monetary policy is not restraining the economy,\u201d she concluded. \u201cI am increasingly concerned that higher interest rates could be necessary later this year to fully restore price stability and appropriately balance both sides of the Fed\u2019s dual mandate.\u201d<\/p>\n
Hammack, another dissenter, also sounded the alarm about inflation Tuesday<\/p>\n
\u201cThe longer inflation remains above our goal, the greater the risk that it feeds into expectations and becomes embedded in wages, contracts, and pricing behavior,\u201d she told the City Club of Cleveland. This is why I often use the phrase \u2018in a timely fashion\u2019 when I speak of returning inflation to our objective.\u201d<\/p>\n
Hammack said \u201csharp increases in oil prices can pose a challenge to monetary policy. They raise production costs for many goods that derive from oil, and rising gasoline prices increase transportation costs. These forces put upward pressure on the prices of many goods and services, challenging the inflation side of our mandate.\u201d<\/p>\n
She said higher energy costs also pose risks to employment, because they \u201ccan slow consumer spending and, in turn, economic activity and employment growth.\u201d<\/p>\n
That presents the Fed with a dilemma, according to Hammack. \u201cWhile higher inflation usually calls for more restrictive monetary policy, a softer labor market usually calls for more accommodative monetary policy. To balance these two outcomes, it\u2019s sometimes best for policymakers to \u2018look through\u2019 an oil shock by holding interest rates steady.\u201d<\/p>\n
But it was plain she sees the greatest risks on the inflation side. for while \u201cthe economy has been resilient so far,\u201d and while labor market data \u201cpoint to resilience and stability,\u201d inflation poses a greater threat in her view.<\/p>\n
\u201cBy contrast, the picture for inflation is not encouraging,\u201d said Hammack. \u201cInflation is too high and is moving higher.\u201d Even after stripping out energy and food, core PCE inflation is \u201calso well above our objective and well above levels from six months or a year ago.\u201d<\/p>\n
She said the Fed needs to be \u201cforward-looking when setting interest rates\u201d and therefore presented different scenarios.<\/p>\n
\u201cUnder one scenario, it\u2019s possible that an extended period of high oil prices and supply chain pressures will boost inflation while eventually weighing on growth and the labor market,\u201d she said. \u201cIn this case, policy could remain on hold for some time to balance weaker prospects for the labor market with elevated inflation.\u201d<\/p>\n
\u201cAlternatively, a sharper downturn in spending and the labor market could warrant a more accommodative stance of policy, although I see this as less likely,\u201d Hammack continued.<\/p>\n
However, she went on, \u201cthere is a growing risk that inflation could remain elevated if energy costs do not come down quickly and if businesses feel they have no choice other than to raise prices.\u201d<\/p>\n
\u201cIf inflation persists at an elevated rate, then more restrictive monetary policy could well be needed to bring inflation back to 2 percent in a timely fashion,\u201d she added.<\/p>\n
Like many of her colleagues, Hammack placed heavy emphasis on inflation expectations. \u201cWith the economy now in its sixth year of elevated inflation, consumers, businesses, and financial markets may start to build in expectations for higher future inflation.\u201d<\/p>\n
\u201cIncreases in inflation expectations that threaten our goal warrant taking decisive action,\u201d she added.<\/p>\n
Hammack suggested there is no urgency to move policy in either direction. \u201cFor today, it\u2019s reasonable to keep rates steady given the uncertainties around the economic outlook.\u201d<\/p>\n
\u201cBut if recent trends continue, it may soon be appropriate to act,\u201d she continued. \u201cBased on the data, I\u2019m more concerned about the growing risks of persistently elevated inflation than the risks to full employment and also that monetary policy may not be sufficiently restrictive to bring inflation down to 2%t.\u201d<\/p>\n
\u201cIf we wait for definitive evidence that high inflation has become embedded in the economy, it may require larger policy adjustments, at greater cost,\u201d she added.<\/p>\n
Barkin took his usual balanced approach Thursday morning in talking about how the Fed should respond to the impact of the Iran war.<\/p>\n
So far, he said the economy \u201cremains resilient,\u201d but as the war continues, \u201cthe extent of its impact will depend on how long it lasts and how long it takes to rebuild supply chains and manufacturing capacity once it\u2019s resolved.\u201d<\/p>\n
Barkin, repeating late May remarks in Raleigh in Loudon County, Va., said the \u201capproach of looking through supply shocks has worked well for a generation thanks to what economists call \u2018anchored long-term inflation expectations.\u2019\u201d<\/p>\n
But with supply shocks seemingly becoming \u201cmore frequent,\u201d he said the Fed\u2019s job cold become \u201cmore challenging conditions.\u201d<\/p>\n
Whether the Fed will \u201chave the luxury of riding out all the waves that come our way\u201d will depend on \u201chow much businesses, consumers, and inflation expectations can take,\u201d he said. \u201cFirst, will businesses get queasy? \u2026 Second, will consumers abandon ship? Thus far, they\u2019ve continued to spend.\u201d<\/p>\n
Finally, Barkin asked, \u201cHow secure is the inflation expectations anchor?\u201d So far, he said long-term inflation expectations \u201cremain well anchored.\u201d But he added, \u201cWith inflation above our 2% target for over five years now, it\u2019s worth asking whether the cumulative impact of so many waves risks loosening the anchor.\u201d<\/p>\n
\u201cThe answers to those three questions will determine whether the Fed still has the luxury to look through supply shocks,\u201d he added.<\/p>\n
Barkin said the FOMC\u2019s decision to hold rates st eady on April 29 \u201cmade sense to give ourselves some time before setting sail.\u201d<\/p>\n
\u201cGoing forward, I wouldn\u2019t be surprised if we continue to see rough seas that pressure the employment side of our mandate, the inflation side of our mandate, or conceivably both,\u201d he continued. \u201cIf we do, the Fed is well positioned to respond as appropriate.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"\u2014 Rate Hike Sentiment Rising, But Most Inclined to Be Patient \u2014 Easing Bias Seems Increasingly Likely To…\n","protected":false},"author":2,"featured_media":198337,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[138,219,111,139,69],"class_list":["post-461290","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-business","tag-economy","tag-new-zealand","tag-newzealand","tag-nz"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/461290","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/comments?post=461290"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/461290\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media\/198337"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media?parent=461290"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/categories?post=461290"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/tags?post=461290"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}