(Bloomberg) – Two of the Federal Reserve’s most dovish policymakers on Friday defended the central bank against allegations that it has fallen far behind the curve on inflation control.
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Fed Governor Christopher Waller and St. Louis Fed Bank President James Bullard argued that critics were not paying enough attention to the tightening of funding conditions that the Fed had already planned before the March rate hike began.
“Credible forward guidance means that market rates have risen significantly before any concrete action by the Fed,” Bullard said in a note prepared for a conference organized by the Hoover Institution at Stanford University. “This provides a different definition of ‘behind the curve,’ and the Fed isn’t that far behind based on that definition.”
Waller, who was previously chief research officer at the St. Louis Fed, made a similar point, arguing that a shift in Fed rhetoric caused investors in financial markets to price in rate hikes in September, leading to a rise in 2-year Treasury bonds The returns he estimated were equivalent to two quarter-point rate hikes by the central bank.
“Thinking about it that way, how far behind the curve could we possibly be, using forward guidance to effectively look at rate hikes from September 2021?” he said.
The Fed did hike rates in March and followed that up this month with a half-percentage-point hike, the largest rate hike since 2000. Fed Chair Jerome Powell signaled officials could take similar steps at upcoming meetings in June and July. The Fed also announced that it would start reducing its bond holdings at a monthly pace of $47.5 billion in June, increasing it to $95 billion after three months.
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A number of speakers at the conference, titled “How Monetary Policy Got Behind The Curve And How To Get Back,” criticized the Fed for reacting too late to rising inflation, which is now at a four-decade high .
Waller said the Fed was focused on returning the US economy to full employment and that its attempts to do so were marred by a series of weak payrolls reports that were later revised significantly upwards. He also said the Fed wasn’t the only one not anticipating the big burst of inflation.
“If we had known then what we know now, I think the committee would have accelerated tapering and hiked rates sooner,” Waller said. “But nobody knew, and that’s the nature of real-time monetary policy.”
Financial markets have been tumbling this week as investors digested the Fed’s latest policy move and Powell gave a clear signal that officials are not currently considering a major 75 basis point hike.
“I never rule anything out. So I think everything would be on the table,” Richmond Fed President Thomas Barkin told Market News International in a podcast published on Friday, citing the possibility of a 75 basis point rate hike. “I’m just saying our pace is quite accelerated at the moment and so if you go at the pace that the chairman has suggested, that’s quite an accelerated pace.”
The central bank has been criticized for lagging behind the curve in responding to the hottest inflation in 40 years. Consumer prices rose 8.5% in the 12 months to March, according to data from the Department of Labor.
Officials say they plan to raise interest rates this year to a level they believe is more “neutral” for the economy, which they say is around 2.5%, and potentially higher if inflation doesn’t ease.
Minneapolis Fed President Neel Kashkari, probably the most dovish central bank official, said earlier Friday that rates may need to rise above neutral if supply chain pressures, which are driving prices higher, don’t ease.
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