The Fed leadership always prefers a unified picture of its members to its policies. Sometimes, however, some skirmishes break out over those policies and other desired directions and I think we are in the midst of such a time.  The Fed governors are still very wedded to the idea of the recent inflation thrust as being transitory while other members of the FOMC, namely some of the regional Fed presidents, are more worried that the Fed could be falling behind the inflation curve and as such are desirous of a faster policy response (i.e., quicker rate hikes).  In the end, the outcome is likely to be what the Fed governors desire as it is they who ultimately dictate policy direction and not the sometimes headline-seeking comments from regional Fed presidents. It is this time, when policy is near an inflection point that it is most important to  listen not only to what a Fed official is saying but also which Fed official is saying it.


Unlike Man All Dots are Not Created Equal

Yesterday, Fed Chair Jerome Powell spoke before a House select subcommittee as part of his obligation under the initial pandemic-related stimulus program, the CARES Act. He was there ostensibly to inform Congress of the progress under the Act but also to provide his views on the direction and trend of the economy. His prepared remarks were almost verbatim what he had prepared for the  FOMC meeting the week before. As for inflation, he still believes the latest bout of price pressures  are transitory and will soon abate as supply-side pressures ease and spiking demand from re-opening service-side businesses starts to ebb.

Source: Bloomberg


While a lot was made last week of the pulling forward of two rate hikes into 2023 from 2024 there wasn’t much attention paid to the resolute  bunch of five dots that still felt no rate hike would be necessary through 2023. Those five dots, we gather, are most likely Fed governors. The bunch that tends to lead and direct policy discussions at the Fed. While regional Fed presidents are provided the opportunity in the meetings to submit their forecasts and opinions, it’s more likely that the Fed governors, through their long seven-year terms and permanent voting presence, ultimately control policy direction. So while the median of dot plots may have drifted higher for 2023 in last week’s meeting, the Fed governors, it would seem, remain resolute in their stance that the price spikes experienced recently are transitory and that a quicker tightening response will not be necessary. It’s important to remember that unlike man, all dots are not created equal.

Copper Prices Starting to Recede

One of the driving forces of inflationary fears of the last few months has been the relentless climb in commodity prices across a wide range of products. From copper to lumber to other critical inputs to manufacturing, this topic has been front and center in the inflationary debate. Copper is especially critical as it’s  included in so many components. Whether it’s plumbing or electronics, or something in between, it’s not called the Doctor of the Economy for nothing.


As shown in the graph provided by Citigroup, the monthly increase in prices since April 2020 has finally turned down this month. It’s just one month after a multi-month climb but it does bear watching and reminds us that prices don’t head to the stars unimpeded. Prices act as their own self-regulator to a certain degree. A similar pattern is playing out in lumber. The Fed may have it right that the bulk of the price action of the last few months could be transitory. Some early signs, as shown above, are starting to signal that.

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 0.21 0.45 0.74 1.08 1.94 2.40
0.50 0.20 0.42 0.68 0.97 1.80 2.29
1.00 0.19 0.39 0.65 0.93 1.71 2.16
2.00 0.38 0.59 0.85 1.59 NA
3.00 0.80 1.53 NA
4.00 1.48 NA
5.00 1.45 NA
10.00 NA

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Published: 06/22/21 Author: Thomas R. Fitzgerald