Hawkish Comments From Fed’s Waller Send May Rate Hike Odds Surging

The Fed schizophrenia was on full display this morning when two days after the latest FOMC minutes showed that the Fed is now expecting a recession in the second half, and moments after the latest retail sales print showed the weakest growth in nominal retail sales in three years, Fed Governor Christopher Waller (a Trump appointee) broke with such recent doves as Austan Goolsbee who earlier this week said the Fed should slow down and evaluate the damage from the bank crisis, and said that he favored more monetary policy tightening to reduce persistently high inflation, although he said he was prepared to adjust his stance if needed if credit tightens more than expected.

“Because financial conditions have not significantly tightened, the labor market continues to be strong and quite tight, and inflation is far above target, so monetary policy needs to be tightened further,” Waller said Friday in a speech in San Antonio, Texas. “How much further will depend on incoming data on inflation, the real economy, and the extent of tightening credit conditions.”

A string of bank collapses last month has added new uncertainty to the outlook this year. Waller said he viewed bank stresses as easing, though he also said he wasn’t sure how much credit tightening would result from the troubles.

“All else equal, a significant tightening of credit conditions could obviate the need for some additional monetary policy tightening, but making such a judgment is difficult, especially in real time,” Waller said.

Ironically, at exactly the same time, Citi CFO Mark Mason was speaking on the bank’s earnings call saying that, well…. read it for yourselves:

• *MASON: CITI HAS TIGHTENED CREDIT UNDERWRITING IN CONSUMER LOANS

Waller however plowed on undeterred: “I would welcome signs of moderating demand, but until they appear and I see inflation moving meaningfully and persistently down toward our 2% target, I believe there is still work to do.”

The Fed governor said he took no comfort in this week’s consumer price report showing inflation dropping to 5% as he focused on core inflation, excluding food and energy, which has shown little progress.

“I interpret these data as indicating that we haven’t made much progress on our inflation goal, which leaves me at about the same place on the economic outlook that I was at the last FOMC meeting, and on the same path for monetary policy,” he said. It isn’t clear if Waller will demand pushing rates higher until core inflation is exactly at 2%, even if it means double digit Fed Funds rates.

The Fed governor repeated his view that monetary policy will need to remain tight “for a substantial period of time, and longer than markets anticipate,” but also cautioned uncertainty is high.

“There are still more than two weeks until the next FOMC meeting, and I stand ready to adjust my stance based on what we learn about the economy, including about lending conditions,” he said.

In retrospect, Waller’s comments were not all that surprising: Fed policymakers have penciling in one additional quarter-point hike this year, and markets are pricing in the likelihood of a final rate increase on May 3, although the modest CPI miss and yesterday’s huge PPI miss trimmed odds of a May hike; still most Fed officials who have spoken have highlighted the need to do more to return price gains to their 2% target. And sure enough, moments after Waller’s prepared remarks hit, the market implied odds of a May rate hike spiked from 70% earlier this morning to as high as 89% before easing modestly.

Waller’s prepared remarks were shared before release of Friday’s retail sales data and come amid some increasing signs of differences of opinion by policymakers, amid the central bank’s staff forecast of a mild recession.