Thoughts From The Divide – Taper Talk
“It’s time… to react”
Having only just recently revealed the Fed’s own definition of the word transitory, the Fed is now hanging up the word’s spurs. Speaking to Congress, Powell attempted to distance the Fed from the word, arguing that “it’s probably a good time to retire that word and try to explain more clearly what we mean”. However, the big news out of his testimony was the shift in Powell’s stance on tapering. Powell officially joined the Fed members we discussed a few weeks ago, saying that given “the economy is very strong and inflationary pressures are higher”, it would be appropriate to wrap up the taper of asset purchases “perhaps a few months sooner” than originally scheduled.
Market commentator Mohamed El-Erian, having already warned of the potential dangers posed by the Fed ignoring inflation, took Powell’s “U-turn” on inflation as encouraging, but argued that the Fed must follow up quickly by detailing “why it got its inflation call wrong” and by moving “a lot faster in tapering its monthly asset purchases”.
Even today’s weaker employment numbers, where NFP came in well below estimates, weren’t enough to derail taper talk (unemployment admittedly dropped to 4.2%, with participation ticking up as well). As Reuters reported, St. Louis Fed’s James Bullard “intensified his call for faster action” even after the weak jobs data. Bullard upped the hawkish tone saying, “the danger now is that we get too much inflation”, and went as far as to say he expected “upward revisions to the payrolls number”.
On the other side of the pond, the ECB’s Christine Lagarde is holding on to the transitory idea, equating the current inflation profile in Europe to a hump and noting that “a hump eventually declines”. She added that the ECB “stands ready” to respond and “would not hesitate to act” if inflation met the ECB’s conditions for raising rates. As an aside, the latest Eurozone Manufacturing reading from IHS Markit showed that November saw “a continuing sellers’ market” with demand “pushing prices charged for manufactured goods higher at a rate surpassing anything previously recorded in almost two decades”. However, the report did note that “rising COVID-10 infections rates cast a darkening cloud over the near-term outlook”.
Meanwhile, the IMF wrote in a blog post on “enduring inflationary pressures” that given “gross domestic product close to pre-pandemic trends, tight labor markets, and now broad-base inflationary pressures” in the U.S., the Fed should “place greater weight on inflation risks” and argued that it would be appropriate for the Fed to “accelerate the taper of asset purchases and bring forward the path for policy rate increases”.
P.S. You can find more of Julian’s thoughts in his recent interview here.