Yahoo recently described the views of Fed Governor Christopher Waller and St. Louis Fed president James Bullard:
Fed Governor Christopher Waller and St. Louis Fed Bank President James Bullard argued that critics don’t take enough account of the tightening of financial conditions that the Fed engineered even before it began raising interest rates in March.
“Credible forward guidance means market interest rates have increased substantially in advance of tangible Fed action,” Bullard said in remarks prepared for a conference organized by the Hoover Institution at Stanford University. “This provides another definition of ‘behind the curve,’ and the Fed is not as far behind based on this definition.”
Waller, who was previously head of research at the St. Louis Fed, made a similar point, arguing that a shift in Fed rhetoric led investors in financial markets to start pricing in rate increases in September, leading to a rise in 2-year Treasury yields that he estimated were equivalent to two quarter-point rate increases by the central bank.
I recall Fed officials making the same sort of claims in the 1970s. But higher rates don’t necessarily represent tighter money. Over the past year, higher interest rates partly reflect higher inflation expectations, and perhaps to some extent a stronger economy. The same sort of confusion occurred in the 1970s.
The Fed still has not come to grips with their policy failure—although in fairness, the Fed’s critics also misunderstand the fundamental problem. I see very few people on either side of the debate pointing out that the Fed has abandoned average inflation targeting. That’s the key policy failure, not the delayed rate increase.