Behind the curve: Fed desperately tries to catch up

Behind the curve: Fed desperately tries to catch up

Bruce Clark

Tue Mar 22, 2022 3:08pm

Below are some lines (in bold and italicized) delivered by Fed Chair Powell Monday before the National Association for Business Economics (NABE) and taken directly from the transcript of the speech. The commentary that follows in regular font is mine.

The speech perfectly explains the collective perception in the markets over the past several days of how far behind the curve Fed policy is, triggering a meltdown in bond prices and flattening of the yield curve. Unfortunately, it also reveals a general lack of confidence on behalf of policymakers to now deliver a soft landing after admitting to being surprised by the acceleration in inflation beginning in H2 2021.

1) Powell: There is an obvious need to move expeditiously to return the stance of monetary policy to a more neutral level, and then to move to more restrictive levels if that is what is required to restore price stability. Previous forecasts of a modest policy adjustment that left real rates negative are unlikely to turn back inflation and are no longer operational, causing the sharp selloff in Treasuries and repricing of the terminal Funds rate higher. Goldman Sachs analysts now see the Funds rate exceeding neutral (2%-2.5%) and topping at 3%-3.25% in Q3, 2023.

2) The inflation outlook had deteriorated significantly this year even before Russia's invasion of Ukraine. (Oops, cc: White House)

3) …the risk is rising that an extended period of high inflation could push longer-term expectations uncomfortably higher. The last refuge of the Fed's gradual policy preference has been that long-term inflation expectations remained 'well-anchored'. That appears to be in play.

4) I believe that these policy actions and those to come will help bring inflation down near 2 percent over the next 3 years. Transitory = three years.

5) There is no recent experience with significant market disruption across such a broad range of commodities. In other words, we don't know.

6) I hasten to add that no one expects that bringing about a soft landing will be straightforward in the current context—very little is straightforward in the current context. Points for honesty.

7) My colleagues and I will do our very best to succeed in this challenging task. Doesn't brim with confidence.

Powell is referred to in the record as Chair Pro Tempore Jerome H Powell, serving as a reminder that Powell's renomination remains held up in the Senate. It is a very low delta probability that he wouldn't be confirmed, but those opposed certainly have some arguments to use against him.

The speech displays a notable urgency to the Fed's policy outlook. Through miscalculation, the Fed surrendered the ability to effectively communicate policy and guide market expectations.

Now it is trying to play catch-up, and it shows.