Photo: Federal Reserve/Waffle House
By Michael O’Neill
“Good Food, Fast” is the slogan of the iconic American restaurant chain, Waffle House. If the Jerome Powell Federal Reserve adopted a catchy slogan, “Monetary Policy Muddled,” would fit the bill.
The Fed left interest rates unchanged but announced they were tapering asset purchases by $15.0 billion/month, which was not a surprise. At that pace, the pandemic QE purchases will end in June 2022. The reduction meets the definition of tapering, but it is more waffle than pancake, especially for an economy that the Conference Board forecast to grow 5.7% y/y in 2021 and 3.8% y/y in 2022.
The Fed began QE in response to the coronavirus pandemic. Since then, the US has administered 423.9 million vaccines, and 58.05% of the population has had two doses. Arguably, the US has achieved “herd immunity,” and deaths of those who chose to forgo vaccinations are just natures way of culling the herd. That also means the Fed no longer needs to provide monetary stimulus to offset a pandemic that has mostly run its course.
Fed Chair Powell knows US inflation is running at 5.3% y/y, which is well above the Fed’s 2.0% target, and their recently modified goal of aiming for inflation to average 2% over time. The surge in inflation is a by-product of aggressive US government fiscal and monetary stimulus, combined with post-pandemic consumer demand as restrictions eased and severely disrupted supply chains.
Mr Powell acknowledged that inflation was well above the Fed’s target and wants you to believe the FOMC has a solid grip on inflation trends. Powell is adamant that the inflation spike is due to supply constraints, and once those constraints ease, inflation will drop to its 2.0% target.
Should you believe him? Prior to the pandemic, Fed officials could not explain why inflation was persistently below their 2.0% target. Now, they want to convince you they know why inflation is so far above target and when it will fall.
Mr Powell waffled on the issue in his press conference opening statement, noting, “it is very difficult to predict the persistence of supply constraints or their effects on inflation. Global supply chains are complex; they will return to normal function, but the timing of that is highly uncertain.”
Mr Powell was at his waffle-best following a question from Wall Street Journal reporter Nick Timiraos who asked, “The markets anticipate you will raise rates once or twice next year. Are they wrong?
Mr Powell’s response was a convoluted ramble about Fed communications in a highly uncertain world as the economy evolves in unexpected ways. He said the focus of this meeting was on tapering asset purchases and not on raising rates. We don’t think it is time to raise interest rates. There is still ground to cover to reach maximum employment growth in terms of employment and participation. The time for lifting rates will depend on the path of the economy and policy will adapt appropriately.”
So, would you like syrup on those waffles?
The Bank of Canada is in the same inflation boat as the Fed, but Governor Tiff Macklem was more decisive in his press conference last week. He said “I want to assure you that inflation is not going to stay as high as it is today, even if it is going to take somewhat longer to come down. So far, measures of medium- to longer-term inflation expectations remain well anchored on the 2 percent target, and overall wage pressures remain moderate. This suggests that higher prices are not becoming embedded in expectations of ongoing inflation.
Nevertheless, the BoC hedged their inflation outlook by raising their 2022 forecast by 1.0% to 3.4%, and suggested rate hikes may occur sooner than previously expected.
The CME FedWatch tool projects a 63.8% chance of a 0.25% rate hike in June 2022. The Montreal Exchange predicts a BoC rate hike in March.
The FOMC meeting ended with a tepid taper and serving of waffles.