Jerome Powell fumbled around in the dark on his way through the final post-FOMC press conference of 2021 on Wednesday. At times, it was a painful spectacle.
The mitigating factor for the Fed following the Committee’s dramatic policy pivot in the face of the highest inflation in four decades, was simply that everyone is flying just as blind as they are.
Sure, some analysts and a handful of former officials predicted inflation would be higher for longer, but some pundits predicted Donald Trump would win the 2016 election too. And some enterprising individuals predicted the collapse of the US housing market.
In our zeal to celebrate and immortalize out-of-consensus views that turn out to be right, we tend to forget how rare an occurrence that actually is. That’s why contrarian bets pay out so well — because they were extremely unlikely to be winners. Every outcome, no matter how anomalous, seems obvious in hindsight.
Powell on Wednesday acknowledged that inflation is likely to persist above the Fed’s target well into 2022. Everyone, he noted, generally agreed that should things continue along the current trajectory, rate hikes (plural) will be appropriate. The economy “no longer needs” the same level of monetary support, hence the decision to accelerate the pace of the taper.
Read more: Fed Bids ‘Transitory’ Adieu, Pulls Hikes Forward, Doubles Taper Pace
In the Q&A, Powell was asked first to reconcile the notion that, “rapid” progress notwithstanding, the labor market hasn’t yet met the threshold for rate hikes and the new dot plot, which tips a trio of hikes in 2022.
He struggled. The Fed, he said, looks at a “broad range of indicators” to take the pulse of the jobs market. It’s “admittedly a judgment call,” he remarked, juxtaposing maximum employment with inflation, “where one number dominates.”
Steve Liesman, who disguises his penchant for aggravating Powell by asking ostensibly good questions, wondered how continuing to buy assets helps address the inflation problem. His point was simple enough: An accelerated taper still entails buying bonds. It’s still gas on the fire, just less of it.
Powell alluded to tantrums or, more aptly, the Fed’s desire to avoid them. “We’ve learned that it’s best to take a careful and methodical approach,” he said. “Markets can be sensitive to it. We’re basically two meetings away.”
It was the first time during the press conference that Powell effectively suggested the Fed won’t, under any circumstances, deviate from a plan to end balance sheet expansion in March. But it wouldn’t be the last. Although he nodded on occasion to the customary statement language around flexibility, the bar for extending purchases beyond Q1 seems exceptionally high.
Asked by Liesman if the Fed is still committed to not raising rates until the taper is finished, Powell reiterated that, if past is precedent, March will dawn in exactly two and a half months. “Since we’re two meetings away,” he said, trailing off, before telling Liesman that “if we wanted to liftoff before then, we would stop the taper sooner.”
FT wondered how much distance there should be between the end of the taper and liftoff. Powell was unequivocal in noting that at least in his view, the Fed need not wait as long as it did previously. After emphasizing that the Committee “hasn’t made a decision of that nature,” he said he doesn’t “foresee an extended wait.” “Inflation is well above target and growth is well above potential,” he added.
Nick Timiraos quizzed Powell on the evolution of his views on maximum employment. “We’re not going back to the same economy as we had in February of 2020,” Powell began, before meandering his way into a discussion about the subdued labor force participation rate and his disappointment that the end of supplemental unemployment benefits, the return to in-person learning and vaccinations didn’t prompt an immediate move off the sidelines for more workers.
“We don’t have a strong [recovery in the] labor force participation rate yet and we may not have it for some time,” Powell told Timiraos, before effectively suggesting that the Fed can’t wait around forever. “We have to make policy now and inflation is well above target.”
Reuters asked Powell to don his virologist hat and explain Omicron. Initially, he was reluctant to engage. “We read the same articles in the paper,” he said. “There’s a lot of uncertainty.”
Perhaps remembering that he did stay at a Holiday Inn Express last night, Powell obliged. “It may well come to the United States and replace the Delta variant. That may well happen,” he mused. “People are learning to live with this.” “We don’t know much [about Omicron],” he continued. “We’ll know more in three weeks.”
After regaling The New York Times with a fairly dramatic play-by-play recap of his own internal deliberations around inflation (including the revelation that he very nearly pushed for a faster taper than what was originally announced last month), Powell was asked by the AP whether the Fed would still hike rates if growth disappointed in 2022.
“As you know, the SEP is not a plan or a debate,” he responded. “If the economy turns out to be quite different from [the projections], no one will say ‘We can’t change our policy because we wrote something down.'”
Thank God for that. Otherwise, inflation would still be “transitory.”
Fedspeak remains transitory even if inflation is not.
A lot of snakiness on your part, Mr. H. I thought Powell was staying true to his TR word — no not that one — but to TRansparency. While all of us might feel the fed shouldacoulda and — if they ruled the world — woulda done things differently, you have to admit that Powell has always said what the Fed would do, and when the Fed became aware it pursuing the wrong path, it changed course. As you well know, trades work, until they don’t. That’s the market.
How is the following not a nod to exactly what you said?….
“The mitigating factor for the Fed following the Committee’s dramatic policy pivot in the face of the highest inflation in four decades, was simply that everyone is flying just as blind as they are.
Sure, some analysts and a handful of former officials predicted inflation would be higher for longer, but some pundits predicted Donald Trump would win the 2016 election too. And some enterprising individuals predicted the collapse of the US housing market.
In our zeal to celebrate and immortalize out-of-consensus views that turn out to be right, we tend to forget how rare an occurrence that actually is. That’s why contrarian bets pay out so well — because they were extremely unlikely to be winners. Every outcome, no matter how anomalous, seems obvious in hindsight.”
This article is balanced. It starts with the truth (it was an awkward press conference, and Powell isn’t the best public speaker), quickly transitions to a three-paragraph defense of the Fed and Powell (see the passages quoted above), moves on to recap exactly what was said, and by who, then closes on a funny note.
I can’t do much better than that. I try to offer something for everyone, from Fed fans (assuming any exist) to the harshest Fed critics. You can’t please everyone, but I sure try every day.
I thought it was balanced… 🙂
but the thing that annoys me is that we don’t see the Fed thinking… For example, while acknowledging I was wrong about the level and duration of the inflation (and thus some reaction by the Fed, notably on tapering fast, is warranted), I’m still on team ‘transitory’ inasmuch as I believe the inflation we see is being caused by excess savings from US consumers and it’s now gone.
If wage growth was picking up the slack, you could see a wage-price spiral but, afaict, from the vast majority of US workers, 2021 inflation went faster than their wage hikes and they ended up with real wages lower by a couple of points. Assuming that stays true, surely all that’s left are sector specific shortages due to COVID/supply chain issues. And that shouldn’t translate into generalised inflation…
Does anyone disagree with the above? Am I missing some factors?
I watched the whole press conference and still enjoyed reading your recap very much, good to get a perspective on what you and others consider the key questions and takeaways. I think the chair did as well as could be expected given the palpable fear in markets, the vociferous politicians in DC and the overly dramatic financial media. As in your case Powell can’t please everyone, but he did try today.
+1 … I think both Jay Powell and Walt Heisenberg did as good a job as can be expected today. Critics are many, and crystal ball owners are few.
I own a crystal ball, but I think it’s broken
” You can’t please everyone, but I sure try every day.”
Yep.
And for investors, maybe it’s fun or justifies our existence to parse every economic statistic and forecast, but haven’t we all learned that none of it really matters to the equity market? Just follow the money!!
Now, as Mr. Lucky would be quick to point out, the results of policy changes are often a different matter for “the man on the street.” This stuff has real world consequences. How many questions thrown at Mr. Powell focused on that?
I thought this article was good. My favorite Heisenberg article of recent memory was from last week when U mercilessly decimated Burgess for saying Americans are $34 Trillion richer. Your facts and figures were irrefutable. I wish BloomB had the courage to post Ur rebuttal in their Opinions section. Although I tend to be more centrist/less liberal about federal spending, I always enjoy from Ur eloquent and often clever turns of phrase.
Powell has the toughest job of all equipped with the proverbial “Baby in the back room” as well as a multitude of critics . Other than the Transitory characterization which was an obvious (no no) and we all had the opportunity to weigh in on that one . When viewed from a little distance inflation was rooted deeply in the system long before Covid 19 if we chose to see it.
What’s next ? Well , the pendulum will continue to swing and the Tinkerers will try to try to find the best path through the Dark. All the while , the times are changing at a pace no one can truly predict . Interesting times !!
Ah! Finally! Someone to disagree with! 🙂
Honest question and no fear, I hate stupid flame wars : But where was inflation rooted in the pre COVID world? What is driving it today? And what do you expect for 2022/2023?
H: Your article was fine and fair, but your tone struck me as snarky. Powell has caught holy hell from all quarters for his entire term. I understand that is part of his job, but I feel the truth is, in the very uncertain, 24/7 social mediai-sniping world we live in today, Powell deserves having some slack cut in his favor. I worked in DC for a long time, on the hill and for the fourth estate, and I guess maybe I have OD’d on the toxic environment that is our capitol. No question he can be awkward, but he reeks sincerity.
I think both parties could use some Jay Powell transparency from their leaders.
Thank you for your diligent work and your pretty-much unwavering consistency.
Daresay Powell’s approval ratings are more favorable than those of any other national “political” figure. Yes, he’s a rich guy, but I think most folks think he’s straight-shooter who’s trying to do his best for all Americans, not just rich Americans.
In case you weren’t around here several years ago, “snark” used to be in the subtitle of the Heisenberg Report
H: your coverage of all things: economic, political, investment related, world events, societal, and most importantly- issues related to us, as humans, is unparalleled. In a world worried about inflation- the value received from The Heisenberg Report relative to the price paid is unmatchable.
Something enjoyable to read every single day.
Well done.
Don’t give him any ideas about raising rates! I can’t afford “unmatchable”…