Assessment: This would be at least the fourth such shift for an institution that prides itself on forecasts and communication, providing what it hopes to be a reliable road map for market participants and the public …
If the Federal Reserve meets expectations next week and announces a more aggressive unwind of the measures taken to boost the economy, it will mark an important policy shift for the U.S. central bank and Chairman Jerome Powell.
The Powell Fed, in fact, has become almost as known for its abrupt changes in direction as it has for the unprecedented levels of stimulus it has provided during the pandemic.
“What the Fed has proven is the difficulty in forecasting by both committee and consensus,” said Joseph LaVorgna, chief economist for the Americas at Natixis and former head of the National Economic Council under former President Donald Trump. “In market parlance, the Fed has bought the high and sold the low. So I do think there will be a credibility issue going forward.”
“You have planted much, but harvested little. You eat, but never have enough. You drink, but never have your fill. You put on clothes, but are not warm. You earn wages, only to put them in a purse with holes in it.” Haggai 1:6
At its two-day meeting next week, the Fed is expected to say it will double the pace of its bond purchase taper, while also likely hinting at more aggressive interest rate hikes coming in 2022. The moves are coming in response to inflation that is stronger and longer-lasting than Fed officials had anticipated.
But LaVorgna worries that the Fed, after months of calling inflation “transitory,” is now making the mistake of overestimating its duration and tightening at the wrong time. That could necessitate officials again having to change back next year, if the current inflation trend runs out of steam.