Markets Misread Fed Credibility Signals: Experts

Federal Reserve officials are being misunderstood about their stance on interest rates, according to some critics. They claim that markets are misinterpreting signals from the Fed, specifically Chairman Jerome Powell's nominee, Kevin Warsh. Markets have been pricing in rate hikes as a way for the Fed to build credibility and combat inflation.

This view is deemed 'double-poppycock' by some experts, who argue that raising interest rates would actually exacerbate inflation. They point out that the main driver of long-term interest rates is short-term interest rates, not Fed credibility. Additionally, the notion that the Fed needs to raise rates to build credibility is also flawed, as they have not demonstrated any significant ability to control inflation in recent decades.

Warsh has been vocal about his stance on monetary policy, emphasizing the need for the Fed to shrink its balance sheet and slow money growth. He suggests this can be achieved by lowering interest rates, rather than raising them. Critics argue that markets are ignoring these signals and instead focusing on headline inflation numbers, which are largely driven by rising energy prices.

However, some experts do acknowledge that there are concerns about inflation, particularly with regard to money growth. The M2 measure of money supply is rising at a rate of 5.5% annually, which is considered too fast in the current environment. This, combined with the fact that the economy has not slowed down significantly despite tighter financial conditions and higher energy prices, suggests there may be excessive liquidity in the system.