Fed's in tough bind now after latest comments, says former vice chairman Roger Ferguson

Key Concepts

• FOMC (Federal Open Market Committee): The monetary policy-making body of the Federal Reserve System.
• Hawkish Fed President: A Federal Reserve official who favors tighter monetary policy (e.g., higher interest rates) to control inflation.
• Monetary Policy Assistance: Actions taken by a central bank (like the Fed) to stimulate the economy, often through lower interest rates or quantitative easing.
• Inflation Target: The specific rate of inflation that a central bank aims to achieve and maintain (e.g., the Fed's 2% target).
• Short-term Credibility: The market's belief in the central bank's commitment and ability to achieve its stated policy goals in the near future.
• "Hold Camp": A stance in monetary policy where the central bank maintains current interest rates or policy settings without making changes.
• "Whipsawed": To be caught between two opposing forces or movements, often implying a reactive and inconsistent approach.

Introduction of Roger Ferguson The discussion features Roger Ferguson, former Fed Vice Chair, former President and CEO Chair of the Business Council, and a CNBC Contributor, who provides expert insights on the Federal Reserve's monetary policy and market dynamics.

Market's "About-Face" and Fed Communication The conversation begins by addressing a significant "about-face" in the market's sentiment. Initially, the market was reacting negatively to a series of "hawkish Fed presidents," causing probabilities (likely referring to future rate cuts or easing) to decline. This trend dramatically reversed when John Williams, President of the New York Fed and Vice Chairman of the FOMC, uttered "two words: near term." This statement led to an immediate market turnaround.

Roger Ferguson acknowledges that the market perceived Williams' statement as a signal, partly due to Williams' close relationship with Chair Powell and his influential role as Vice Chairman of the FOMC. However, Ferguson shares concern that a single speech could so drastically alter the market's outlook. He argues that this situation places the Fed in a "tough bind": while many policymakers may not be ready to ease monetary policy, the Fed now risks "disappointing the market" if it doesn't align with the market's new expectations, thereby reducing its flexibility.

The Persistent Inflation Challenge The interviewer highlights that inflation has been running "above target" for "four and a half years going on five years," despite the economy not looking "that bad," suggesting it's time to address inflation. Ferguson strongly agrees with this perspective. He points out that inflation has been running "not just somewhat above target but call it 2.9, maybe 3%," emphasizing that this "doesn't round down to two" percent, which is the Fed's official target. He notes that while some factors driving inflation, like housing, "may ease over time," inflation remains a "serious structural problem." Furthermore, he contends that the argument for the labor market being "dramatically weak" to the extent of needing "monetary policy assistance" is "not that strong." Consequently, Ferguson aligns with those who advocate for being "much more cautious about this December move" (implying a potential easing or rate cut).

Data Gaps, Credibility, and Risk Assessment The discussion then shifts to the quality and availability of economic data. The interviewer points out a "hear no evil, see no evil" aspect, noting that while there is "a lot of private sector data on the job market" showing it "getting weaker," there isn't "good data when it comes to inflation." This leads to a perception that the jobs data is weakening, while inflation data is "okay."

Ferguson unequivocally disagrees with this assessment, stating, "I do not." He asserts that the primary risk lies "on the inflation side" and, "most importantly, on maintaining short-term credibility around inflation." He warns of a "whisper in the market that maybe the inflation target is somewhere around 2.5, maybe three," which he believes is "not what they want in the marketplace" (referring to the Fed's desired perception). Given these concerns, Ferguson states that if he were a voting member of the FOMC, he "would be in the hold camp for now," advocating for no immediate policy changes. He cites President Goolsbee from Chicago, who insightfully remarked that "in the absence of inflation data, it's a lot harder to get that genie back in the bottle," underscoring the need for caution when confirmation of falling inflation is absent.

Policy Decision Timing and Credibility When asked if he would delay an FOMC meeting to wait for more data, Ferguson firmly responds, "No, I would not." His reasoning is that the Fed "don't want to be in a place where you seem to be whipsawed by... let's wait for the next piece of data." This stance emphasizes the importance of maintaining a consistent and credible policy approach rather than appearing reactive to every new data point.

Synthesis/Conclusion Roger Ferguson's analysis highlights the Federal Reserve's precarious position, caught between market expectations for easing and the persistent reality of above-target inflation. He critically views the market's swift "about-face" based on a single statement, arguing it has constrained the Fed's flexibility. Ferguson strongly advocates for prioritizing the Fed's "short-term credibility" regarding its 2% inflation target, emphasizing that inflation remains a "serious structural problem" at 2.9-3%, and the labor market isn't weak enough to warrant immediate monetary policy assistance. He advises against policy changes ("hold camp") in the absence of clear disinflationary data and cautions against delaying decisions, stressing the need for a steadfast approach to avoid appearing "whipsawed" by incoming information.