Inflation, Dots And ‘Sustaining The Public Trust’

“Policy will remain accommodative,” Jerome Powell said Wednesday, just before taking questions from reporters following the September FOMC meeting.

Nobody, he said, knows where the economy is going to be several years out. It was a futile attempt to preempt questions about officials’ projections for rates and inflation.

Powell’s presser was largely uneventful, which is just as well. Markets digested the new statement, dots and projections with relative alacrity, so it would’ve been unfortunate (albeit amusing) if he blundered into a misstep.

“What does ‘substantial further progress’ look like now?”, the first inquisitor wondered. “Help us make sense” of the SEP, she implored.

Powell reiterated that the threshold was met for inflation. In fact, he said the Fed has seen “more than ‘substantial further progress'” on prices. The emphasis on “more” was in Powell’s cadence. It was an acknowledgement of the obvious: Price pressures are as pervasive as they are acute.

The question, he went on to muse, is on employment. “Many” Fed officials feel the taper threshold has been met on the labor market front too, he conceded. His own view is that the standard is “all but met” on the employment side.

That was all broadly consistent with the message from the statement, which was itself consistent with market expectations: The taper is coming in November or December, contingent on the labor market.

As for the market reaction, BMO’s Ian Lyngen and Ben Jeffery called it “a carbon copy of what followed the June meeting.” “The dots indicated a willingness to hike rates sooner than previously assumed and the Treasury market responded with a bull flattener,” they wrote, calling the logic “relatively straightforward.”

In essence, market participants may still doubt the Fed’s commitment to countenancing an inflation overshoot. “The market is clearly trading as if the Fed will ultimately liftoff sooner than believed and in doing so undermine the prospects for self-perpetuating reflation and a higher growth plateau,” Lyngen added.

Later, Powell said that while there’s a diversity of views on pace and start date, the current plan (to the extent there is one) has “unanimous, broad support.”

“Those who want to go sooner have made their arguments publicly,” Powell reminded reporters, some of whom conducted the very interviews during which the officials who do “want to go sooner” on the taper expressed their preference for an “early” start.

Notably, Powell said it’s likely the taper can be completed “sometime around middle of next year.” Those looking for a timeline (or the contours of one, anyway), can use that as a guide.

I suppose what I’d say is that an assumed “hawkish” taper pace entails completion around September 2022 (figure below).

One enterprising reporter pointed to the higher PCE projections and asked Powell what he’d say to the “average household” which is being “asked to pay higher prices when real wages have actually gone down.”

Powell blamed the ubiquitous bottlenecks, shortages and supply chain disruptions for surging prices in the short-term on the way to downplaying the out-year forecasts. The overshoots versus the Fed’s target amount to “a couple of tenths,” he said. “Households aren’t going to notice a couple of tenths of an overshoot.”

Before you scoff, do note that the median PCE and core PCE inflation projections for 2022 were just 0.1% and 0.2% higher versus those from the June SEP. For 2023 they were basically unchanged. For 2024, they’re 2.1%.

I mention that not to defend Powell (or the Fed) against accusations that households are seeing a reduction in their spending power, but rather to state the obvious, which is just that if you want to make a point about higher inflation hurting everyday people, the best way to do it isn’t to cite forecasts projecting a tiny increase two or three years from now. Rather, you should suggest those forecasts might be naive. And you needn’t look too far for evidence. The Fed was forecasting 3.4% headline inflation for 2021 in June. Now, just three months later, that forecast is 4.2%.

Asked by the Wall Street Journal‘s Nick Timiraos whether the split on the outlook for a hike in 2022 means the Committee has “a different opinion than you do on the threshold for liftoff,” Powell pointed to 2023. “All but one participant has us lifting off in 2023, so it’s not an unusually wide range of views on this,” he said.

Finally, asked about Kaplan and Rosengren’s trading activities, Powell said he “was not aware of the specifics of what they were doing.”

“We understand that the trust of the American people is essential,” he remarked, adding that the current framework for preventing the appearance of conflicts “clearly is not adequate to sustain the public trust.”