We could say, the Fed speakers are back in town. There were 4 of them with John Williams of the San Francisco Fed, Ms. Loretta Mester of the Cleveland Fed and James Bullard of the St. Louis Fed while an interview with Eric Rosengren of the Boston Fed was published in the Wall Street Journal.
Cleveland Fed President Loretta Mester said she supported the Fed’s telegraphing of roughly three rate hikes per year including one more in 2017 and added that the Fed would also need to soon start trimming its bond holdings.
San Francisco Fed President John Williams said he would support a decision to start slowly shrinking the Fed’s balance sheet at the Fed's next meeting on 19-20 September and that forecasts for one more hike this year seem appropriate, which is in fact against what market expectations are telling us as Fed funds currently imply only a 40 percent chance of another rate hike in 2017.
On the more dovish side, St. Louis Fed President James Bullard said: “Given the inflation outlook, which has deteriorated in 2017, I would not support further moves in the near term. It's possible data will turn around, but we'll have to see. I think for now we should remain on pause.”
Boston Fed President Eric Rosengren in his interview to the Wall Street Journal said: “My own view is that conditions are appropriate, that we should be taking action relatively soon … I think it’s completely appropriate that we start shrinking our balance sheet … At a time when we have the federal-funds rate between 1 percent and 1.25 percent, we now have some leeway to move the federal-funds rate up or down depending on what kind of shocks we get going forward, so there’s no reason to have that extraordinary accommodation coming from the balance sheet any longer.”
All this is said at a moment that the world economy as well as the U.S. economy are firmly established in a mid-cycle area, which is an OK place to be.
Maybe surprising, but to me, the inflation story offers very little to get worked up by. The inflation numbers are basically around their long-term averages in both the United States and the Euro area. The rise of inflation earlier this year was a normalization after a long period of weirdly week oil prices.
Now, we have a far duller inflation story. Take care, inflation is not going away and neither is it likely to continue the momentum we saw in the earlier part of the year.
There are inflation policy pressures that policy makers should and in fact do monitor, as is the case at the Fed.
Central banks need to consider the median term in their deliberations.
Unemployment and wages are inversely related. The Philips curve as it’s known is working. And so, the time as the labor markets in the developed economies is ground for policy concern, but none of this will affect inflation right now.
For policy itself, with normal growth and, yes, normal inflation in the U.S., some attempt to the normal policy should be made.
It’s worth remembering that central banks have 3 main tools with which to exert pressure on the economy:
Pressure from one lever needs to be considered in the context of what is happening to the other two.
I think it’s not an overstatement to say that the Fed should tighten quantitative policy and Fed Chair Yellen is likely to do so at the Jacksonville economic symposium that will take place August 24-26, or just 1 month before the next FOMC meeting in September.
The Fed Chair’s address at the Jackson Hole symposium for economists is an ideal time for setting out the technical details of that because the audience at Jackson Hole is mainly made up of people capable of understanding the technical details of a passive quantitative tightening plan.
And then, there is politics.
Markets seem to be assuming that Congress will have to provide leadership on any policy initiatives that come out.
Long-term trend growth can, of course, be affected by politics and political announcements, but for the time being, the short-term economic cycle is out of politicians’ hands. Let’s hope it stays that way for the time being.
What comes in the autumn is another question.
Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.
© 2023 Newsmax Finance. All rights reserved.