The FOMC minutes didn’t reveal any surprises relative to what was known from the April 27-28 policy statement and Chair Powell’s presser, the March SEP, or from recent Fedspeak. The meeting was held prior to the April jobs disappointment and the spike in CPI. The policy remains on hold for now. Yet, there was some talk from “a number of participants” that “if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchase.”
The dots from the March meeting told us there were some officials who were looking to unwinding accommodation sooner than later. However, the Fed also indicated, which all have repeated consistently, that “the economy was still far from the Committee’s longer-run goals. Moreover, the path ahead continued to depend on the course of the virus, and risks to the economic outlook remained. Consequently, participants judged that the current stance of policy and policy guidance remained appropriate to foster further economic recovery as well as to achieve inflation that averages 2% over time and longer-term inflation expectations that continue to be well anchored at 2%.” The minutes did highlight the improvement in the economy and the expectation that y/y inflation would be picking up near term due to base effects. Both downside and upside risks were acknowledged.
Fed VC Clarida, speaking late in May, echoed the FOMC minutes that there may come a time at upcoming policy meetings to talk taper. The economic outlook is “very, very positive,” he said, and he projects growth somewhere north of 6% and possibly 7%. There are upside and downside risks, while the data remain quite noisy. He expects the pace of the improvement in the labor market to pick up.
Meanwhile, he acknowledged that the recent jump in CPI was a “very unpleasant surprise,” repeating prior thoughts. Of course, he believes inflation is likely to be mostly “transitory.” He is putting a lot of weight on inflation expectations. And he stressed that the Fed has the tools to address a persistent rise in prices should it occur.
The ECB, like most central bankers, remained focused on trying to play down the importance of the pick-up in headline inflation rates and assuring markets that monetary policy will remain accommodative for some time ahead. Against that background, there were more comments backing a possible move to a symmetric inflation target as part of the current review of the overall policy framework at the ECB. Given that the ECB’s current focus is a medium-term definition of price stability that already allows officials to see through temporary overshoots, this would not actually change the policy remit. However, after the lengthy period of inflation undershoots it would send a pretty strong signal that rates will not be raised any time soon.
It may also help to take the sting out of any possible change in monthly asset purchase volumes. The ECB significantly widened monthly targets through the second quarter as economies struggled with a surge in virus cases. With the recovery looking well underway now, officials will have to decide in June whether to scale back levels again in the third quarter, within an unchanged overall PEPP envelope.
The usually under the radar Reserve Bank of New Zealand (RBNZ) shook the markets late in May. While the RBNZ kept the policy rate steady at 0.25%, as expected, bank projections showing a possible hike in the policy rate in the second half of 2022 caught the attention of global markets. Granted, the RBNZ left rates unchanged while downplaying inflation risks and stressing that “considerable time and patience” would be needed by policymakers before they could be confident that inflation and employment objectives were met.
Nonetheless, the RBNZ’s rate projections are the latest tentative sign that some central banks — the Fed is a notable exception — are pivoting ever so slightly to cover the risk that inflationary pressures might sustain, and the associated risk that uber stimulus is setting up global asset markets for an eventual crash. The BoE’s recent decision to slow the pace of its asset purchase program, and the ECB’s reference of “remarkable exuberance” in markets, preceded the RBNZ announcement.
The BoE left the repo rate unchanged at 0.10% and the QE total unaltered, as had been widely anticipated. The repo rate decision was by unanimous vote at the nine-member Monetary Policy Committee, while the vote on the QE was by 8-1. The dissenting voter was Haldane, who is leaving the MPC, and who wanted to lower the size of the quantitative easing program. The BoE still affirmed that the rate of QE purchases would slow down, as previously signaled, which the Bank stressed was purely an operational decision that “should not be interpreted as a change in the stance of monetary policy.”
Takeaway
The Fed and the rest of the world know we are getting hit with rising inflation. Everyone we talk to thinks it is not going to be transitory and there is serious concern that the Fed is clueless or unable to stop the inflation train as it picks up speed. For me personally, I think the “canary in the coal mine” is the $5 chicken at Costco. When Costco increases the price and if the Fed hasn’t done anything, we could be looking at hyperinflation, followed by stagflation. Investors should be getting ready for this now.
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