Some officials are starting to publicly second guess their December estimates.
St. Louis Fed President James Bullard says that it might take four increases to slow down prices instead of three as he had thought. Governor Chris Waller argued three hikes was still his baseline forecast, but cautioned that four or even five moves in 2022 may be needed if inflation fails to abate as expected.
With the committee already shifting, Powell has a chance at his Wednesday press conference to open the door to a rate path with more than three increases this year.
He could even dislodge the idea that hikes only happen quarterly by suggesting that every meeting—there are seven more scheduled in 2022 following this week’s gathering—is potentially live for a move.
Investors have already priced in four increases for this year with the first in March. Some say they could do more, including Goldman Sachs Group Inc. who sees “a risk that the FOMC will want to take some tightening action at every meeting” until inflation is cooled.
Minutes from the December meeting showed a consensus among Fed officials on running off their balance sheet not long after rate liftoff. Powell said earlier this month that the committee wants to move “a little faster” and said more clarity is coming.
Officials say that shrinking their balance sheet will put some upward pressure on longer-term borrowing costs. That tightens financial conditions and works a bit like a conventional rate hike, though the exact impact is hard to judge.
The Fed chair might spell out how the tightening of financial conditions through balance sheet runoff meshes with rate increases—one way perhaps to explain the moderate pace of tightening in their December outlook.
“There is a consensus that the committee wants to get a plan of quantitative tightening in the right place so it is part of the policy mix,” said Julia Coronado, partner at MacroPolicy Perspectives LLC. “There is less consensus around equivalency with rate hikes” or its impact on financial conditions, she added.
Powell has repeatedly said that policy makers need to be nimble as they adjust to an economy that’s responding in unexpected ways during the pandemic. That reflects some hard-won lessons over the last year.
Central bankers insisted for months that price surges would be temporary as demand shifted from goods to services and supply constraints eased. But consumer prices marched higher, reaching 7% last month—the most in almost four decades. Even Biden is telling the central bank to start fighting inflation and normalize policy.
Some question if the Fed behind is the curve and whether Powell will adjust.
“They sure seemed to have dragged their feet in response to their inflation threat,” said Mark Spindel, chief investment officer at MBB Capital Partners. “Are they hard wired to move gradually?”
This article was provided by Bloomberg News.