Internal divisions within the Federal Reserve reappear

Local time on Monday, St. Louis Fed President Bullard and Dallas Fed President Kaplan participated in a discussion of “Fed Week” to speak on the economic outlook. They both said that the Federal Reserve to reduce the size of the bond purchase day is getting closer. But the Federal Reserve “three hands” Williams stressed that inflation is temporary, not to reduce the stimulus.

Kaplan: in favor of the early application of the “brakes”

Kaplan reiterated that he is in favor of putting on the “brakes” as soon as possible, the central bank to buy bonds to lower interest rates and stimulate demand, and now demand has risen, and many factors limiting economic growth are related to the imbalance between supply and demand, the early scaling back of bond purchases will allow the Fed to have more leeway in deciding when to raise interest rates.

According to the Fed’s interest rate dot plot released last week, most Fed members expect to raise rates twice by 2023, significantly earlier than expected in March and a surprise to the market. In this regard, Kaplan said that this is a normal response to the changing economic situation, last December, the epidemic will be how the development of uncertainty, to March, the epidemic has a significant improvement in the momentum of the time in June, the economic outlook improved significantly, so some Fed officials will raise interest rates ahead of time.

Kaplan expects the unemployment rate to fall to around 4% to 4.5% and expects GDP growth to be around 6.5% this year. He also predicts headline inflation of 2.4%, with upside risks, and that “we are in a new era of above-target inflation. He believes more below-the-line jobs could resume by this fall.

Kaplan said the Fed is questioning whether the housing market really needs the Fed’s $40 billion a month in support. He worries that if it waits too long to scale back bond purchases, leading to increased imbalances, it could lead to a greater need for additional action in the future.

Brad: Powell must take the lead in discussing QE tapering, and can also raise rates before tapering is completed

As a representative of the doves camp, Bullard on Friday suddenly released a “hawkish” signal caught the market by surprise, he warned at an online event on Monday that the Fed should be prepared because inflation may exceed the vast majority of people’s expectations by the end of 2022.

Bullard said the U.S. economy is recovering faster than expected, and inflation may continue to remain on the 2% target set by the Fed, and may even rise further. He believes that before adjusting monetary policy, Fed officials need to decide on the upper limit of the inflation rate they can accept, as well as how long inflation is allowed to exceed the target.

Bullard believes that the U.S. economy is not in recession, but firmly in expansionary mode. He expects core PCE inflation to be 2.5 percent in 2022, expects more improvement in the labor market, and he is not worried about the labor market side of the equation. He said Fed Chairman Powell must take the lead in discussing the issue of scaling back bond purchases, and the committee is only now starting to discuss the issue of debt reduction, which will take some time. The current debate is about what monetary policy must do to bring inflation back down to a moderate 2%, and what it means to have inflation above 2% for a period of time.

Bullard revealed that the Fed believes it should scale back its bond purchases and adjust them if needed. Bullard said that while the market expects the Fed will not raise interest rates when it cuts QE, it depends on the tapering plan set by Fed Chairman Powell, and “if necessary, rates can also be raised before the tapering plan is completed.”

He also mentioned that “an increase in the size of the use of reverse repo does not seem to be a problem”. Adjusting the reverse repo rate is currently a technical issue, but could become an issue in the broader tapering debate.

Williams: Inflation is temporary, not yet time to reduce stimulus

Also speaking overnight was FOMC permanent vote member and New York Fed President Williams. He spoke at the Banking Conference.

Williams said that the economy has not improved enough to narrow the stimulus, and the economy is still a long way from a full recovery. He expects inflation to likely rise to 3 percent this year and fall to nearly 2 percent in 2022, with U.S. real GDP expected to grow 7 percent this year.

Williams said the recent spike in inflation mainly reflects the temporary impact of the economy opening up at an alarming rate. As price uncertainty emerges, the Federal Reserve will pay careful attention to inflation data. Supply chain disruptions are a notable problem facing the economic recovery. Bottlenecks will recede over time, but may reappear next year. The most important thing is to watch the employment and inflation-related data.

Williams believes that, for now, low interest rates are not a problem and monetary policy can be adjusted according to changes in the global situation. Williams also said that the Fed is “discussing the scale of bond purchases” for discussion, but has not yet made a decision on the strategy to reduce bond purchases, there is still a long way to go from the Fed’s criteria for reducing the size of bond purchases, can not tell when the Fed can slow down the pace of bond purchases.

He said the overnight reverse repo was fully in line with expectations and that the Fed’s adjustments to the managed rate were designed to keep the federal funds rate within the target range as downward pressure on short-term interest rates was increasing. He said he was not concerned about the high use of overnight reverse repo tools or whether the scale of use would continue to increase.