Jerome Powell said what he needed to say Wednesday in prepared remarks for his semi-annual policy chat with Congress.
“The standard of ‘substantial further progress’ is still a ways off,” he insisted, referencing the Fed’s deliberately vague and, I’d argue, stale, forward guidance.
With both Powell and John Williams in the “still a ways off” camp, markets can rest easy — and you can take “easy” figuratively and literally. Fedspeak over the last several weeks clearly suggested a lack of consensus or, to use the preferred euphemism, a “diversity of opinions.” Although most of Powell’s colleagues are careful to avoid being emphatic, it’s obvious that some believe the threshold was met prior to the June meeting.
But as long as Powell and Williams are publicly stating that whatever progress has been made doesn’t count as “substantial” in the context of the forward guidance, it’ll be difficult to make the case for any further acceleration in the tightening timetable. The market is already looking at Jackson Hole and the September meeting for something definitive on the taper timeline, and last I checked, August and September still follow July. So, June’s “hawkish” pivot was it. Unless you’re expecting fireworks at a non-SEP meeting, there simply isn’t a forum for any shift between now and when the market is already expecting new guidance.
In the same remarks to the House Financial Services Committee, Powell said the labor market has “a long way to go.” That’s hardly a new observation, but the reiteration is intentional — it’s meant to justify the “patient” policy stance in the face of accelerating inflation. I suppose I’m compelled to roll out the “MIA” chart again (figure below).
There are still at least seven million “missing” jobs. It’s possible (some would say likely) that they’ll be recouped in a hurry later this year when enhanced federal unemployment benefits roll off and in-person learning resumes in earnest.
For now, though, “frictions” remain, with the gap between vacancies and hires hitting a new record high at the end of May. I’ve mentioned previously that, in the event temporary distortions are what’s holding back the labor market, persisting in policy easing on the excuse there’s “a long way to go” on the jobs front could end up being a mistake. That’s conceptually similar (in a vice versa kinda way) to preemptively tightening based on rising price pressures only to see inflation move rapidly lower once distortions fade.
Ideally, temporary friction is what’s holding back the labor market and fleeting factors are mostly responsible for elevated inflation. If both of those dynamics “correct” simultaneously, the economy should be in a good place — progress towards full employment will accelerate, wage pressures will abate as labor supply increases and inflation will moderate as supply chain disruptions ease. But that’s subject to the old “best laid plans” quip.
The balance of Powell’s remarks skewed dovish Wednesday. He said the jobless rate understated the employment shortfall, reiterated that inflation will moderate, said the Fed would continue to discuss the appropriate pace for monthly asset purchases in coming meetings and promised (for the umpteenth time) to give the market ample notice prior to any decision on tweaks to QE. The dollar subsequently hit session lows.
The message was clear enough: Recent data, including, one assumes, June CPI, hasn’t changed the Fed’s mind. Or at least not where “the Fed” denotes the Committee as a decision-making body. For now, the “hawks” will need to be satisfied with debating the taper and a dot plot shift.
It’s possible (indeed, it’s likely) that Powell feels pressure to avoid saying anything that could be construed as confirmatory when it comes to the notion that the Fed has abandoned FAIT. Positioning-driven though it was (at least at the long-end), the post-June FOMC flattening in the curve prompted some to worry that policymakers had already thrown in the towel when it comes to countenancing an economic overheat. Powell likely wants to push back on that.
While there’s a lot to be said for preserving whatever credibility the Fed has when it comes to fighting inflation, the paradox is that a quick retreat at the first sign of higher prices could do more to undermine the Committee’s credibility than a premature hawkish lean. After all, nothing erodes credibility more than the perception of panic. At least in the short-term, it’s better to be wrong and calm than to be perceived as right and scared.
