Federal Reserve’s Rookie of the Year Sets the Tone for 2022

(Bloomberg Opinion) -- In just a year, Federal Reserve Governor Christopher Waller has emerged as a powerful voice from within the central bank about the state of the U.S. economy and the direction of monetary policy. Investors ought to heed his outlook for 2022, which includes raising interest rates as soon as March and moving quickly to trim the Fed’s $8.8 trillion balance sheet.

Waller, who took office on Dec. 18, 2020, was previously research director of the St. Louis Fed and viewed as a moderate pick from President Donald Trump. After making his first set of projections for the economy and the fed funds rate at the central bank’s meeting in March, the rookie governor’s comments largely toed the party line. “We’re a long ways from raising rates at this point,” Waller said on March 29. 

A few weeks later, after a blockbuster jobs report, Waller became more outspoken. “I think the economy is ready to rip,” he said on April 16. But, he added, “I’m from Missouri. We take the view that we are the ‘show me’ state. So show me the outcomes and then we will start talking about” interest-rate increases. After April’s consumer price index data exceeded expectations, he reiterated that the economy “is going gangbusters” but confirmed the central bank would remain accommodative until it saw problematic inflation.

By the end of June, at which point core CPI was running at the fastest annual pace since the early 1990s, Waller had seen enough economic progress to argue for an earlier tapering of the Fed’s asset purchases. Just two weeks earlier, Fed Chair Jerome Powell had been noncommittal, saying only that the central bank had started “talking about talking about” potentially slowing its bond buying. 

In August, as Powell was teeing up a Jackson Hole presentation that made a full-throated defense of transitory inflation, Waller was less sanguine. He argued for a tapering announcement by September on Aug. 2, just a few days after Fed Governor Lael Brainard, who was nominated to serve as the central bank’s next vice chair, said the labor market had a ways to go before clearing the “substantial further progress” test. Waller’s view won the day — Powell strongly suggested at the September meeting that the Fed would begin scaling back asset purchases in November.

Waller was ahead of the curve again last month, too, favoring an even faster taper than the Fed had agreed upon weeks earlier. On the same day, Vice Chair Richard Clarida also acknowledged that “policy may need to pivot to a faster taper.” But Waller was far more forceful: “The rapid improvement in the labor market and the deteriorating inflation data have pushed me toward favoring a faster pace of tapering and a more rapid removal of accommodation in 2022.” The central bank last week doubled how much it would pare back its monthly bond buying, and policy makers penciled in three interest-rate increases for 2022, in another victory for Waller.

All Fed governors are highly influential in setting the course of monetary policy. But in recent years, there appeared to be a clear hierarchy: The chair, vice chair and the New York Fed president are considered the “core” of the Federal Open Market Committee. Meanwhile, the rest of the board falls in line — no governor has dissented from a decision since 2005 — while a few outlier regional bank presidents make noise.

Yet Waller, whose former boss was Jim Bullard, one such boisterous regional Fed president, has defied those groupings in his first 12 months. His influence may only grow in 2022, with President Joe Biden set to nominate newcomers to the board. Some potential candidates, like Atlanta Fed President Raphael Bostic, were already committee members this year, but others, such as Duke University law professor Sarah Bloom Raskin and former Consumer Financial Protection Bureau director Richard Cordray, would come from outside the central bank’s current top ranks.

For that reason, bond traders would be wise to pay attention to his latest remarks, in which he said in no uncertain terms that “March is a live meeting for the first rate hike.” He also added that “if we start doing some balance sheet runoff by summer, that’ll take some pressure off, you don’t have to raise rates quite as much. … My view is we should start doing that by summer.” That’s about as clear a policy road map as investors are going to get from any Fed official. If the economy develops as he expects, Waller is advocating for a rate increase in March, starting the runoff around June, then raising rates in September and December.

Of course, his Dec. 17 comments came before Senator Joe Manchin of West Virginia seemingly torpedoed the Biden administration’s economic agenda. If there’s no fiscal boost ahead, and risk assets continue to slide as they have in recent days, the Fed might feel pressured to push back interest-rate increases until later in 2022.

Still, Waller’s track record in 2021 speaks for itself. “I knew he would do very well — he’s got a gift with metaphors, he’s a very straight shooter,” said David Andolfatto, a senior vice president in the St. Louis Fed's research division who was hired by Waller in 2009.

“I would say Chris may have been a little more sensitive to incoming inflation data than other members,” Andolfatto said in a phone interview. “It's fair to say that most of us were surprised by the strength of it, and Chris was very quick to get ahead of the curve on that.”

Waller had a strong rookie year on the FOMC. As bond traders close the books on 2021 and look to get a leg up on policy decisions next year, keeping tabs on how his outlook develops would be a good place to start.

More From Other Writers at Bloomberg Opinion:

• The Fed’s Pivot Is Anything But Hawkish: Narayana Kocherlakota
• Fed Makes a Welcome Pivot But Has More to Do: Mohamed El-Erian
• The Fed Needs to Seize Back the Inflation Agenda: John Authers

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

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