MNI INTERVIEW: Ex-Fed's Plosser Sees More 2022 Dots in Sept.

Federal Reserve officials are likely to bring forward forecasts for the start of rate hikes into 2022 at their September meeting due to what will prove persistently elevated inflation pressures, former Philadelphia Fed President Charles Plosser told MNI.

"From March to July the number of people who thought interest rates would have to rise in 2022 to 2023 went from almost zero to over half the committee," said Plosser, one of the architects of the dot plot during his tenure at the Fed.

"That told you that most of the committee now believes they are going to have to raise rates in 2022-2023 in order to keep inflation near 2%. My guess is that when you see the September SEPs there will be more, and they'll be higher."

July's dot shift came after just three months of inflation readings well above Fed and even market expectations, including annualized consumer price index prints above 5% -- despite a change in the Fed's framework that was supposed to actively strive for overshoots to make up for a decade of readings below the 2% target.

Plosser believes inflation concerns driven by the combination of supply chain pressures with very loose fiscal and monetary policies will force the Fed to begin hiking rates in 2022. Nearly all Fed members now seem committed to some degree or another to starting a QE taper before those eventual hikes, he noted.

"That clearly is coming in conflict with their guidance," Plosser said.

"It's not that the Fed uniformly believes inflation is transitory. They now believe they will have to raise rates in order to achieve their target."

TAPER TIMING TIED TO RATE PATH

Markets will keep seeing the debate about tapering as a signal for the path of the federal funds rate, he said, adding that a 2022 hike is a growing possibility.

"Given the current environment, they need to be prepared to be able to hike rates next year. And they better get themselves in a position where they can do that. And that means to get started with tapering sooner rather than later," Plosser said.

"If you listen to the FOMC members there are quite a number now who kind of agree with that."

Plosser expects supply chain pressures to last much longer than previously expected, especially in light of fresh risks emanating from Covid's Delta variant.

"The Fed can't do anything about supply chain issues. By continuing to stimulate demand when you can't generate supply just raises prices on everything else that people are trying to buy," he said, pointing to spikes in prices of production goods from metals and plastics to computer chips.

"The Fed is playing a risky strategy here by claiming that the inflation is transitory or temporary, when in fact their policy stance is actually acting to make it worse and more persistent."

FAULTY FRAMEWORK

Plosser said he does not have a point forecast for inflation this year and next because he sees the path of consumer prices as tied to the Fed's actions. But he sees little reason for price pressures to abate suddenly.

This is a major shortcoming of the Fed's framework shift, Plosser said.

"Their policy never anticipated that they would get inflation before they got full employment. Now, lo and behold, that's where we find ourselves."

The Kansas City Fed will hold its annual gathering virtually for a second year this week and, while some investors expect some kind of QE taper nod from Fed Chair Jerome Powell's keynote speech, Plosser thinks that's not coming until September.

"I wouldn't not be surprised to see them announce something in September, that they were going to get started. What they might say in September is that we're going to start and it's going to start November 1st," he said.

(See: MNI: Fed Set For Sept. Taper Warning After Jobs Surge--Advisers)