- Bloomberg – Simon Kennedy: With Friends Like These
Harvard professor Robert Barro and BofA Global Research’s Ethan Harris are among those who reckon Chair Jerome Powell and colleagues are facing the most widespread criticism since the 1970s, when inflation was heading above 10%, and Arthur Burns and then G. William Miller were in charge.
- Bloomberg – Steve Matthews Powell’s Inflation Strategy Takes Fire From Ex-Top Fed Officials
Chair takes the most heat from ex-colleagues since the 1970s
Former officials predict a recession and much higher rates
The passage above is from the May 6 monetary policy conference at the Hoover Institution. When Jim Bullard was asked a difficult question, he deferred to former Fed official Randy Quarles, who was the vice-chairman of supervision until this past January.
Quarles said the Fed would accept a 1.5% rise in unemployment to rein in inflation. We are not hearing anything close to this from Fed officials. Was Bullard thinking this but afraid to say it? This exchange underscores our belief that former Fed officials have the freedom to say what current Fed officials cannot.
With this in mind, what other comments are former Fed officials making? Perhaps most front and center is former New York Federal Reserve President Bill Dudley’s opinion piece last month that suggested the Fed may have to actively lower the stock market:
- Bloomberg – (April 6, 2022) Bill Dudley: If Stocks Don’t Fall, the Fed Needs to Force Them
Tightening financial conditions will be key to getting inflation under control.
It’s hard to know how much the U.S. Federal Reserve will need to do to get inflation under control. But one thing is certain: To be effective, it’ll have to inflict more losses on stock and bond investors than it has so far.
Former Federal Reserve Governor Rich Clarida is far more hawkish than current officials:
- Bloomberg – (May 6, 2022) Ex-Fed Vice Chair Clarida Says Rates Must Rise to at Least 3.5%
Expeditiously getting to neutral is not enough to cool inflation
Asset-rundown effect on financial conditions to influence move
- The New York Times – Jenna Smialek: The Fed Is Set to Pull Back Economic Help Rapidly. Is It Too Late?
Federal Reserve officials took a while to recognize that inflation was lasting. The question is whether they can tame it gently now.
“They need to engineer some kind of growth recession — something that raises the unemployment rate to take the pressure off the labor market,” said Donald Kohn, a former Fed vice chair who is now at the Brookings Institution. Doing that without spurring an outright downturn is “a narrow path.”
- CNBC – (May 5, 2022) Why the market is taking Powell’s ‘soft-ish’ economic language so hard: Former Fed official Roger Ferguson
* Inflation may have peaked, but it isn’t going away.
* Even with its “famously blunt” tools and Fed chair Powell expressing confidence in a “soft-ish” landing, the Federal Reserve will not be able to keep markets from being volatile and the economy from a rocky period.
* The long-term outlook remains positive, but the next 18 to 24 months will be tough for businesses, according to former Fed official and former head of investing giant TIAA Roger Ferguson
- Bloomberg – El-Erian Says Fed Lost Credibility With Markets, American Public
He urges the bank to explain why the inflation view was ‘so wrong’
Says Powell shouldn’t have taken a 75-basis-point rise off table
- Bloomberg – Wage Slowdown May Be Positive Sign in Tight U.S. Job Market, Summers Says
Ex-Treasury chief warns against Fed making strong predictions
Policymakers still face ‘turbulent waters,’ Summers says
We believe the people noted above are saying what current officials cannot. The Fed is behind the curve and has some painful choices ahead. Financial markets are reflecting this reality.