FED: Bowman Eyes Upside Inflation Risks, But Probably Wouldn't Oppose Dec Cut
Dec-06 15:36
Fed Gov Bowman (hawk, permanent voter) maintains her concern over stubborn inflation, saying at an event Friday that lowering rates too quickly could reignite inflation, and as such she prefers to ease "cautiously" and "gradually".
- She doesn't provide a steer on her December meeting decision preference, but emphasized that inflation is her biggest priority - suggesting a typically hawkish approach, pending next week's CPI/PPI data.
- While her view is that it's hard to see the current level of rates as restrictive, we're doubtful she would dissent to a broader FOMC consensus on what now seems like a likely 25bp cut in December (recall she dissented to the size of the 50bp cut in September; she says that she doesn't take a dissenting vote "lightly").
- On her approach to rate cuts: "As the US economy remains strong, lowering the policy rate too quickly could unnecessarily stoke demand and potentially reignite inflationary pressures... As we're looking forward and as I'm considering decision-making within the FOMC context, I would prefer that we proceed cautiously and gradually in lowering the policy rate as inflation remains elevated."
- On disinflation stalling and the December decision: We've seen progress in lowering inflation but that progress has stalled. So in my view, upside risks to inflation remain prominent, especially at full employment. We'll see some more inflation data next week, that will help support my approach to the December FOMC decision...
- "Our goal is 2%. It's not 2.5% percent, it's not 2.7%, it's 2% and we haven't yet accomplished 2% and from what we've seen over the past, well, actually, since May, we haven't seen any decline in the rate of increase in inflation since that time."
- On November nonfarm payrolls: Our labor market is near full employment...core inflation continues to be elevated. Although it's increased this year, the unemployment rate remains at a historically low level, below my estimate of full employment. The labor market remains tight, the rise in unemployment rate reflects less hiring...The unreliability of the labor market data makes me cautious about taking signal from the data.
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FED: Powell Has Questions To Answer On Long-End Rates (2/2)
Nov-06 15:30
Chair Powell has plenty of pretext to fend off any questions over the implications of the election for monetary policy, and will as always reiterate the importance of the Fed’s political independence and won't comment on the potential impact of fiscal policy changes. But related to this – and trickier for Powell to answer – will be questions about developments across the rates spectrum since the last meeting, which may suggest caution over the approach to easing.
- First, what does the FOMC regard as the reason for the recent bear steepening in the yield curve, and second, does this run counter to the Committee’s desire to return overall policy closer to neutral?
- On the first question, the rise in the long-end of the curve (10Y yields up over 80bp since the September meeting) has been driven by real yields. 10Y TIPS-implied inflation breakevens are up 26bp since the pre-September FOMC lows close to 2%, which were lowest since Jan 2021 - and up 7bp post-election, now set to close at the highest since May, at 2.37%. But even more impressively, TIPS-implied 10Y real yields are up 12.5bp since election day, and 56bp since September lows - contributing the bulk of the rise of the 10Y yield.
- This implies among other things that monetary policy is seen being tighter for longer. And 10Y term premia, a compensation for the risk of holding future uncertainty, had already risen to the highest since November 2023 pre-election.
- Much of this move has been attributed to political developments, with the potentially inflationary implications of a “Republican sweep” scenario being priced in.
- While he won’t opine on the politics, it will be interesting to hear his answer to the question of whether the Treasury long-end’s reaction is due to any perception that the Fed erred in making such a large cut in September - given a resurgence in risk assets, a string of upside economic surprises, and a rise in inflation expectations.
- Another question is whether the FOMC is comfortable with the growth-dampening and financial condition-tightening implications implied by longer-end yields rising. For instance, mortgage activity has already slowed again as rates have rebounded higher – does the FOMC see this as being aligned with their dual mandate goals at this stage of the cycle?
- And for December's meeting, there will be multiple implications: first for the Dot Plot, which as noted above could see some dots drift higher for 2025, and could hasten an increase in the Longer-Run dot. And second for the rate decision itself: the bar is set a little lower for a skip, due to a combination of robust data, potential that the Fed sees the movement in the long end of the curve as undesirable and indicative of renewed growth/inflation prospects (ie the election result).
