Brainard/Waller Q&As Give Preview of Next Week’s Presser

There was a lot more in the Q&As of Waller (hawk) and Brainard (dove) speeches last week than what was reported in the media (Waller’s transcript here; I produced my own transcript for Brainard – let me know if you would like a copy). I compare key points below.

Brainard and Waller agree that the FFR is in a restrictive territory, but they disagree on policy lags, which Brainard sees as longer than Waller. They disagree on labour demand: Brainard thinks it is cooling, Waller does not.

There is less than full disagreement on inflation and policy next steps. On inflation, Brainard implies that the current slowdown is likely to continue while Waller thinks we need to wait until after summer to be confident of that. On the policy stance, Brainard is ‘determined to stay the course’, without specifying what this means, while Waller supports continued tightening. Also, Brainard believes that at this stage the Fed is balancing both risks to inflation and employment.

This suggests any policy turn may not materialize until the September meeting because the 2021 inflation volatility makes it hard for the doves to ignore Waller’s point. Meanwhile we will get labour market data, which is much less volatile than inflation data and will make it clear whether the Fed should balance risks to both inflation and employment or focus more on inflation.

Waller’s Q&A is good prep for next week’s presser because the questions next week are likely to be along the same lines. Namely, what is the Fed seeing with inflation that the market is not and what will it take for the Fed to cut?

Key Points From the Q&A

Inflation

Waller: Need more data to be confident inflation is going South.

• Not enough data to be confident inflation will continue to slow, need to wait until after summer.
• Firms are losing pricing power.
• Core services disinflation has been driven by energy.

Brainard: Inflation is slowing.

• Biggest inflation risk from China reopening is through commodities prices.
• ‘Price-price spirals’ have driven inflation up, but markup compression could contribute to disinflation.
• No wage price spiral.
• Energy and core goods deflation are expected to moderate, price level to flatten out.
• Declines in housing services inflation expected by the third quarter.
• Non-wage inputs could help bring down non housing services inflation.
• Persistent components of non-housing core services and core goods are fading.

Labour Market

Waller: No softening yet.

• JOLTS involuntary separation rates haven’t moved in a year.
• Unemployment duration v short.
• Firms are still experiencing workers shortages.
• Atlanta Fed median wage has moderated less than average wages.
• Decline in temporary workers could be because employers are opting to hire full time workers.

Brainard: Labour demand is cooling.

• Average weekly hours, temp, NFP, wage growth are slowing.

Policy

Waller: I support continued tightening.

• Rates ‘pretty close to sufficiently restrictive’.
• Fed market discrepancy on FFR reflects 1. Market unrealistic expectations that inflation will melt away and 2. Fed risk management to ensure inflation does not take off again.
• Policy easing would require inflation to slow as markets expect and that ‘wages and everything fall into place’.
• Fed would need to hike more if employment ‘does not loosen’ and ‘inflation takes off again’.
• Policy lags about 9 to 12 months.

Brainard: We are determined to stay the course.

• We are in restrictive territory and ‘probing for the sufficiently restrictive level’.
• We are balancing both risks to inflation and employment.
• Policy lags: full effect of 2022 tightening still lies ahead.
• Policy will need to be sufficiently restrictive for some time.

Why was the Fed so wrong on inflation a year ago?

Waller: The mistake was ‘betting the farm on transitory.’

Brainard: ‘We confronted unprecedented circumstances.  Some central banks started tightening sooner than the Fed, some later but it did not lead to different outcomes on inflation.’

Other Interesting Points

Waller: Global CB asynchronous policies helped reduce spill overs.

Waller: Can cut while QT is ongoing, will start slowing QT when reserves are 10-11% of GDP, RRP and reserves are substitutes, $1tn QT equivalent to about 25bp hike but rough estimate.

Waller: Real time data ‘amazingly’ consistent with legacy data, main advantage of real time is lead time over legacy data.

Brainard: 2% inflation target consistent with ‘rational inattention’ (when ppl see inflation as low enough to ignore it).

Brainard: US fiscal policy is in a better place than other countries because of fiscal consolidation that subtracted 1.5% from growth last year.

Brainard: Over the past 30 years we took for granted an ‘enormously elastic supply side.’

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.

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