- The Fed will have to keep rates high and not cut rates by the end of 2023
- Market perception of terminal rate is not far from where we are
- Market expectations for rate cuts later this year is driven by optimism inflation will melt away
- The Fed does not expect inflation to melt away
- Need to keep rates higher for longer because of risk management
- Hard to talk market out of their forecast
- If loosening financial conditions means inflation takes off again will require us to do a lot more.
- 2022 was a humbling experience
- Logic led Fed to think inflation would be transitory last year, but that was a mistake.
- It is a lot easier to cut rates if we are wrong this year.
- How much further rates need to go depends on the data
- If inflation pops back up, rate hikes won’t stop
- Services are heavily labor dependent. If continue to see wages soften that makes our job easier
- Tech workers who lose their jobs are quickly picking up other jobs
- Wage growth above productivity is a concern, otherwise firms will lay them off as too expensive.
- Customers are suddenly are much more price conscious, taking pricing power from firms
- You can’t put a lot of weight on just a few months of inflation data.
- We have to wait and see through the summer how inflation is going.
- If markets are right and inflation is coming down, that’s great news. Would have no problem changing policy
- We are talking about maybe 75 more bps of hikes
- I’d need 6 months, not just 3 to pause
- If there is a recession it would be mild and short lived.
- Balance sheet reduction is running in the background
- Most likely will slow balance sheet runoff when reserves 10% or 11% of GDP
- Both demand and supply have been contributing to inflation.
- Policy lags are not longer 12-18 months as they once were, but are more 9-12 months
- Expects to see policy impact coming through in the next quarter or so
He is right about customers being price conscious. There are substitutes.
The US stocks are reacting positively to the remarks. We really haven’t heard a Fed member admit that they would love to be wrong. Most say we will raise rates to 5-5.25%, and keep rates there for an extended period of time. Although Waller did say he does not see rates coming down in 2023, he also said, “if wrong, would be happy to lower rates”. The market likes that viewpoint.