Markets Need to Heed the Voice of Doves on Fed Rate Trajectory

(Bloomberg) -- Nervous fliers who sweat the small bumps on their journey sometimes wonder why their pilot can’t just fly much lower. From their point of view, flying closer to the ground represents far greater safety than being held aloft at 37,500 feet, buffeted by winds and resisting gravity. It seems to be a similar logic some Fed members use in arguing for low interest rates.

Just Thursday, Chicago Fed President Charles Evans pushed back on market pricing for rate hikes by remarking that any tightening “could begin next year” or “it could be as long as into 2023” since the “big increases” in inflation are simply going to start dropping out. His reasoning flies in the face of the Federal Reserve Bank of New York’s latest survey, which shows inflation expectations over the next 12 months shot up to 5.7%, the highest since the survey began. 

If you ask a hundred economists about likely inflation over the next year, you would possibly get 200 different answers, since they all seem to be in two minds about the issue. Their predicament is at once worthy of empathy since it’s not an easy riddle, this post-pandemic inflation puzzle. In other words, it may be best to have an open mind on the issue -- so to pre-judge the matter doesn’t behoove well of the Fed, especially in light of its own surveys.

Of course, you could dismiss Evans’ remarks as those of a dove -- but Bloomberg Economics’ assessment is that several on the Fed who will be voting next year are of a similar degree of dovish tilt. Clearly, between James Bullard, who wants the monetary authority to move faster on taper, and Evans -- a voter this year and in 2023 -- there’s a wide chasm that needs to be bridged. 

As with everyday flying, even in central banks, there are those who prefer flying close to the terrain. And that poses as big a risk to markets as high inflation.

• NOTE: This was a post on Bloomberg’s Markets Live blog. The observations are those of the blogger and not intended as investment advice. For more markets analysis, run MLIV on the Bloomberg Terminal.

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