Fed hawks Waller, Bullard push back on 'behind the curve' view

TWO of the Federal Reserve’s most outspoken policy hawks on Friday (May 6) pushed back on the view that the US central bank has missed the boat on the fight against high inflation, citing a tightening of financial conditions that began well before the Fed began raising interest rates in March.

“How far behind the curve could we have possibly been if, using forward guidance, one views rate hikes effectively beginning in September 2021?“ Fed Governor Christopher Waller said, noting the rise in yields on the two-year Treasury note that began last fall.

“What may appear as a policy error to some was viewed as appropriate policy by others based on their views regarding the health of the labor market,” Waller said in remarks prepared for delivery at a conference at Stanford University titled “How monetary policy got behind the curve.”

St Louis Fed President James Bullard, also in remarks prepared for delivery at the conference, took note of the rise in the yield on the 2-year Treasury note, seen as a good measure of near-term expectations for the Fed’s policy interest rate.

The Fed raised the latter to a range of 0.75 per cent to 1 per cent earlier this week, a level that critics say is far too low to fight inflation running at three times the Fed’s 2 per cent target.

Given that the 2-year Treasury yield this week was around 2.7 per cent, “the Fed is not as far ‘behind the curve’“ as such critics suggest, Bullard said, “although (the Fed) would still have to raise the policy rate to ratify the forward guidance.”

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Waller and Bullard were among the first Fed policy makers last year to call for a rapid removal of easy monetary policy and a quicker start to raising interest rates.