Opinion: All these doves on the Fed have out of the blue turn into hawks
The big news from Wednesday’s Federal Reserve meeting wasn’t that it will stop buying bonds to stimulate the economy or that it is now announcing three rate hikes in 2022. These short-term policy decisions were made by Fed officials last month.
No, the big surprise is that the gigantic, change-reluctant Fed has turned its assessment of inflation by 180 degrees.
Wednesday’s Fed statement and accompanying materials show that the doves – the policy makers who generally believe the risk of inflation is excessive – have given up completely. Everyone is a hawk now. There are no more pigeons at the Fed.
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Fed monetary policy makers agree that fighting inflation is their primary responsibility. You may disagree on tactics or timing, but not on the strategy to beat inflation soon. The Fed is at war and inflation is the enemy.
For 30 years the pigeons were right: inflation wasn’t the biggest threat to the economy; Unemployment was. The pigeons fought an ultimately successful battle to force the Federal Reserve to take into account the very real costs that unemployment is placing on society and the many individuals the economy has left behind.
But now the effects of the coronavirus pandemic have forced even the pigeons to accept that inflation is a bigger threat than unemployment. This is a big change in an institution that doesn’t like change.
How do we know the pigeons have turned into hawks? Take a look at the dot plot, a chart that the Fed publishes every three months that shows each monetary policymaker’s anonymous individual projections for the level of the federal funds rate at the end of the next few years.
Most analysts correctly focus on the median forecast for the year ahead, but I want to draw your attention briefly to the medium-term projections made by the outliers, the most restrictive and reluctant members of the Fed, to show how strong the battlefield is inside the Fed has changed since that appalling consumer price index reading on November 10th. This report changed everything at the Fed.
December’s scatter plot shows that all Fed policymakers believe that interest rates need to be raised until inflation is defeated.
In the most recent projections released on Wednesday, the most radical members modestly raised their medium-term projections from 1.63% to 2.13% by the end of 2023 and from 2.63% to 3.13% by the end of 2024 as the Fed will raise interest rates the Fed will have to raise above their assumed long-term equilibrium of 2.5%.
But the pigeons have completely destroyed their previous predictions. The five most reluctant members predicted between zero and two rate hikes by the end of 2023, but now they’re expecting four or five. By the end of 2024, they had forecast between two and four rate hikes; now they expect seven.
Obviously, even the most reluctant Fed officials now believe that the Fed fund rate will have to rise sharply to defeat inflation. They used to think inflation would go down on its own.
This means that inflation no longer benefits when in doubt. His guilt is proven, and even the pigeons will pursue the war until victory is achieved. For the inflation pigeons at the Fed, November 10, 2021 was a bit like December 7, 1941: time to go to war.
Rex Nutting is a columnist for MarketWatch and has been involved in economics and the Fed for more than 25 years.
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