In the wake of the Federal Reserve policy meeting this week, stock markets have tumbled, raising howls of criticism that US central bank policy will fail to bring down inflation.
‘Unhinged’ markets followed ‘unforced error’ by Fed’s Powell, says David Tepper
Two top Federal Reserve officials on Friday disagreed with this criticism.
In remarks to the Hoover Institution Monetary Policy Conference in Stanford, Calif., St. Louis Fed President Jim Bullard and Fed Gov. Christopher Waller said the Fed in 2022 has a new tool to help them bring inflation down — “forward guidance” or less politely, open mouth policy.
In the days of legendary former Fed Chairman Paul Volcker, the Fed didn’t even announce when it raised or lowered interest rates, let alone try to explain where it was going.
Over the last 20 years, Fed officials have progressively given more speech and press conferences, so that market participants understand policy.
For instance, while the Fed didn’t raise its benchmark policy interest rate until March this year, months after inflation measures jumped, Waller said the Fed had actually started to use forward guidance starting in September 2021 to start to raise market-interest rates.
Waller said guidance from the Fed boosted the yield on the 2-year Treasury note TMUBMUSD02Y,
from approximately 25 basis points in late September 2021 to 75 basis points by late December.
“That is the equivalent, in my mind, of two 25 basis point policy rate hikes for impacting the financial market,” Waller said.
“When looked at this way, how far behind the curve could we have possibly been if, using forward guidance, one views rate hikes effectively beginning in September 2021?” Waller asked.
“All is not lost. Modern central banks are more creditable than their 1970s counterparts and use forward guidance,” Bullard said, on the same panel.
Bullard noted that the yield on the 2-year Treasury note was 2.71% on Thursday. He said a standard monetary policy rule only calls for that rate to be 90 basis points higher to combat inflation.
Of course, the Fed has to follow through with all of the rate hikes it has promised.
This week, the Fed raised its benchmark Fed funds rate by half a percentage point to a range of 0.75%-1%. Fed Chairman Jerome Powell also signaled the Fed was planning to raise its benchmark rate by a half-percentage point at the next two meetings, which would bring the rate close to 2%. He suggested the rate could go up to neutral, which he said was currently estimated as “sort of, two to three percent.”
Credit: www.marketwatch.com /