‘I do worry very much about what the Fed is doing,’ with inflation, says former Fed governor
Frederic Mishkin, former Federal Reserve governor, on Wednesday said that he feared that the U.S. central bank might be committing a policy error and might already be behind the curve as inflation surges in many parts of the country, amplified by supply-chain bottlenecks in the aftermath of the COVID pandemic.
“I do worry very much about what the Fed is doing,” said Mishkin in an interview on CNBC on Wednesday after the central bank’s final policy update of 2021.
The Fed on Wednesday said it would accelerate the pace of its tapering of bond purchases so that the program would end in March, and eyed three interest-rate increases of its benchmark interest rate next year.
The move comes as U.S. inflation has surprised to the upside this year, forcing the Fed to banish the word “transitory” from its policy statement to describe inflation.
The Fed acknowledged that inflation was elevated and in a news conference on Wednesday after the policy update Chairman Jerome Powell said that the central bank is hoping to prevent inflation from becoming entrenched after referring to it as transitory in previous meetings, a term that the Fed has eradicated from its lexicon in this update.
However, Mishkin, Alfred Lerner Professor of Banking and Financial Institutions at the Graduate School of Business, Columbia University, warned that the Fed might be behind the 8-ball already.
“I actually think they are getting behind the curve,” Mishkin said. He cautioned that the Fed might need to accelerate its pace of rate hikes to curb inflation.
As expected, the Fed left benchmark federal-funds rate between 0% and 0.25% but new projections based on the median forecast by officials sees the federal-funds rate rising to rise to 0.9% by the end of 2022, to 1.6% by the end of 2023 and 2.1% by the end of 2024.
Mishkin, who was a member of the Fed’s governing board between Sept. 5, 2006 and Aug. 31, 2008, said that the Fed may be making the mistake of waiting to see full employment before it ramps up interest-rate increases, which by some measure he estimates might already be at or near full.
The Fed has two mandates full employment and stable prices. Inflation is well above the central bank’s annual target of 2%. In Wednesday’s update, the Fed described the current state of inflation as meeting its goal of 2% implying that it is accepting a higher rate of inflation and expecting it to recede at some point.
Core consumer prices, which exclude volatile food and energy categories, were up 4.9% in November, a 30-year peak..
The Fed’s December policy update comes as the omicron variant of the coronavirus that causes COVID-19 has raised questions about the global economic recovery from the pandemic.
The stock market, the Dow Jones Industrial Average DJIA, -0.08%, the S&P 500 index SPX, -0.87% and the Nasdaq Composite Index COMP, -2.47% all had pivoted higher following the Fed’s updated statement Wednesday afternoon, with many already pricing in expectations for a faster tapering of asset purchases.
The 10-year Treasury note yield TMUBMUSD10Y, 1.418% was up to around 1.47% from around 1.44% before the Fed update, with signs of the yield curve—the differential between shorter-dated Treasurys and longer-dated, shrinking. Yield-curve compression is often read as a sign of a downbeat outlook of the economy by fixed-income investors.