The Fed’s media blitz is targeting a skeptical market: McGeever By Reuters

By Jamie McGeever

ORLANDO, Fla. (Reuters) – The Federal Reserve has sharply stepped up its New Year’s anti-inflation discourse to match high labor markets and consumer price gains, but its pace and breadth of change in tone may have something to do with coercion. to take money markets more seriously.

As the monthly economic figures are still pandemic-related distortions and COVID-19s are still plagued, it has been tremendous to shift from a more relaxed “wait and see” attitude to a gradual black activism to urgently reverse the stimulus.

Although Fed Chairman Jerome Powell has been criticized for strengthening his credentials to secure his appointment, the Fed’s conversion has come from the spectrum of the Federal Open Market Commission.

Take Mary Daly, president of the San Francisco Fed, a labor market economist and inequality expert, who is one of the weakest members of the FOMC.

Until recently, until mid-November, Daly insisted that inflation would moderate. Raising interest rates would not solve supply chain barriers and other temporary problems with rising prices, but would hurt employment and the economy.

“Uncertainty requires us to wait and watch,” he said on Nov. 11, adding on November 16, “Running headlong into the fog can be expensive. Patience is the most courageous act we can do.”

Last week, he said the policy needed to be “definitely” adjusted, albeit cautiously, to deal with inflation.

A brief timeline of the Fed’s latest guidelines is useful.

By the end of September, half of the 18-strong FOMC had not seen an increase in the interest rate until at least 2023. Future U.S. markets and Wall Street heavyweights Goldman Sachs (NYSE 🙂 at the time had no rate changes this year.

At the November 2-3 meeting of the FOMC, the markets discounted only one quarter of a point increase this year, which was not the case until September.

The FOMC turned on the screw at its mid-December meeting. He noted three rate hikes this year, one more than the market was priced at the time, and said he would speed up the limit on completing asset purchases in March.

In a recent tour, the minutes of that January 5 meeting also revealed that the FOMC had opened initial discussions to reduce its overall assets.

The markets finally got the suggestion. Future markets are close to being fully priced in 2022 four-point rate hikes in 2022, starting in March. Economists at Deutsche Bank (DE :), JP Morgan and Goldman Sachs have broken old expectations and want to squeeze 100 bps this year.

CATCH PLAYING

This huge price revision in the short-term rate markets for 2022 seems to be what the Fed wanted. Several Fed presidents have been in the markets since the new year, and Powell himself offered no setbacks in Tuesday’s Senate ratification session.

“They know what they’re doing. I think that was intentional,” said Joseph Wang, a former Fed chief opener at the market.

Wang believes that the strength of wage growth and inflation has recently been concentrated in the minds of FOMC members that is close to fulfilling the bank’s double price stability and maximum employment mandate.

Whatever the reasons for their evolution, he believes they will be concerned that Fed officials did not bring the market with them, which is why it is an aggressive communication to put the market on the line.

The first warning shots were fired in November. The Fed announced it would soon begin reducing its $ 120 billion in monthly asset purchases, and Powell said it was no longer accurate to describe inflation as “transient.” The FOMC then announced in December that there were three rate hikes by 2022 and the market was finally caught.

However, despite the return of expectations in 2022, the market still does not believe that the Fed will be ready or able to achieve its neutral or “terminal” rate of 2.5% – because the future of 2025 still sees policy rates below 2. %.

This is important for investors trying to guess what the long-term horizon for official interest rates is. If the stress cycle ends sooner than the Fed expects, long-term bond yields and the dollar may also fall, while maintaining high-octane technology stock valuations in the process.

But this assumes that there is a clear picture in politics or market circles.

David Blanchflower, a professor of economics at Dartmouth College and a former policy maker at the Bank of England, seems to have set FOMC members a three-line whip to talk hard about rates. But it has nothing to do with economics.

“They have no idea what will come in 2022. They have no data and no forecast model, so it’s okay to wait and see. They’re lost,” he said.

(Opinions here are from the author, Reuters columnist).

(By Jamie McGeever; edited by Andrea Ricci)