Don’t Worry, Jerome Powell Has A Plan

The US economy can “flourish” in an environment of tighter Fed policy, Jerome Powell said Wednesday, after the Fed hiked rates and signaled a half-dozen additional moves in 2022.

He played down sharp cuts to the Fed’s growth forecasts, saying the projected rate of expansion is still very strong.

The press conference was interrupted by apparent technical difficulties with the audio feed, which felt somehow appropriate considering how broken the entire world is at the current juncture.

Read More: Fed Delivers Liftoff, Signals Seven 2022 Hikes

In response to a question from The Washington Post, Powell stated the obvious. “We still expect inflation to be high through the middle of the year,” he said, before suggesting it’ll “begin to come down and then come down more sharply next year.” He cited the impact of the war on commodities, among other factors.

Multiple reporters repeated some version of the same inflation questions. Powell, in turn, repeated some version of the same answer. As he put it around a half hour in, the Fed “doesn’t have a perfect crystal ball,” but the Committee does have powerful “tools” and isn’t scared to use them.

The Wall Street Journal‘s Nick Timiraos, who penned two articles in two days in the lead up to Wednesday’s decision, asked Powell if the Fed is concerned about higher inflation mechanically pushing real rates lower, offsetting efforts to tighten policy.

It was a good question, and a point I’ve revisited time and again in these pages over the past two weeks. The figure (below) shows where things stood at the height of the rally in raw materials earlier this month.

Powell didn’t have an answer for Timiraos. Rather than address the question, Powell simply touted the Fed’s commitment to the inflation fight.

“The Committee really does understand” that the time for tighter policy has come, he said, adding that when he looked around the table during this week’s proceedings, he “saw a Committee that’s acutely aware” of the need to address price pressures.

A few minutes later, a reporter from Politico wondered “how much” of the expected deceleration in inflation Powell would preemptively attribute to rate hikes that haven’t happened yet.

“Part of inflation coming down at the beginning is clearly due to factors beyond our policy,” he said, citing base effects and prospective supply chain improvements. “Monetary policy bites inflation on a lag,” he added, suggesting the Fed’s hawkish pivot late last year is already helping by exerting pressure on financial conditions.

I suppose I’d just note that although expected Fed tightening most assuredly worked to tighten conditions in January, when real yields rose and stocks fell in tandem, recent equity declines were plainly the result of geopolitical jitters. As Timiraos noted, the surge in breakevens that accompanied the jump in commodity prices pushed real rates lower, potentially at cross purposes with the Fed’s efforts to tighten policy.

All of that was more nuance than Powell was in the mood to entertain Wednesday, struggling as everyone was with an unreliable audio connection and an occasional echo that made Powell sound like he was addressing reporters from the dark recesses of a deep cave.

On the balance sheet, Powell said an announcement could come as soon as May, and reiterated that QT will likely proceed at a faster pace compared to the last cycle. He also attempted to reassure markets that the Fed still believes it can achieve price stability without impacting the labor market.

“We see the pain of higher inflation,” he said, in a well-meaning, if unavoidably farcical, attempt to empathize with people less fortunate than himself, which, statistically speaking anyway, is pretty much every American.

At one point, Powell adopted a somewhat fatalistic tone while describing the hopelessly ambiguous macro environment. “There are many moving pieces and we really don’t know” what’s going to happen, he conceded.

In a separate exchange, he emphasized that the Fed “has the tools” it needs to fight inflation. “And we’re going to use them,” Powell insisted. “As you can see, we have a plan.”


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12 thoughts on “Don’t Worry, Jerome Powell Has A Plan

    1. You are correct and so is the Fed. Each factor contributing to “inflation” can clearly be traced to a function of it’s own supply/demand balance. “There’s no such thing as a stock market, only a market for stocks” applies here.

      1. RW: Right on. COVID is a virus which has greatly upset the ability of humans to keep up the flow of what is needed to make our lives “normal.” The Fed had (and has not now) any real power to change this condition. By changing the environment in ways that have created temporary scarcity, COVID has secondarily increased the bargaining power of suppliers in many key markets. Shipping in containers has increased in cost by four times, for example. The ability to process food, paper products, etc., while having legitimately set the stage for many higher prices, has also presented key suppliers with the opportunity to expand their profit margins without transparency. They will do it as long as they can until we stop paying their prices.

        Every product we use has a value creation structure that affects its final price. Knowing that, it is amazing that many of our products can reach the market as cheaply as they do. Consider a box of Cap. Crunch. What does it consist of? First, there is raw grain, probably only 5-10% of the cost of the product. The grain is bought on the commodity market for the going price, perhaps hedged by the company. It has to be shipped from the market location to the company’s plant in Cedar Rapids, Iowa to be made into cereal. Shipping cost is rising for many reasons and grain has a relatively low weight-to-value ratio making the shipping cost per pound relatively high. Then there is the cost for the company to process the grain through repeated steps required to make it suitably edible and then to convert it into the actual cereal ready for packaging. As to packaging, there is the cost of cardboard, package line material, and the required equipment. On occasion the package costs as much as the grain. All the package inputs had to be shipped to the company as well, again at a relatively high cost per unit because of the low value of these materials. Throughout all this initial work there is a cost for labor, energy, overhead, and money for the suppliers to cover their costs and provide them with a profit. Finally, after many steps, each having to cover costs and supplier profits there is cereal to ship. The individual packages are bundled and loaded into more trucks to ship all over the country. The truckers, too, have to make a profit after paying costs for trucks, drivers, insurance, gas, etc. Where is the cereal now? It is probably at a grocery wholesaler, a chain store warehouse, etc. It is not at a retail store ready to buy yet because that wouldn’t be economical. So the big load is broken into smaller ones and packed into another truck and finally shipped to a store where it is unloaded (more labor, more gas, etc. Then in the middle of the night it is put on the shelves and offered for sale at a price which must account for the store’s total costs, including what was paid for the cereal which has been marked up several times to account for the other people and companies that helped make it into cereal and deliver it. So let’s say that box used to be priced at Kroger’s “low price” of $4. Now start messing with the inputs and value chain elements, gas goes up, labor goes up (Target is offering new drivers $30/hour while some over-the-road guys get 100K a year) grain goes up, electricity goes up (when it’s not being shut off in CA and TX), etc. I really don’t know how we can get a box of cereal for $3-4. And no matter what they do Biden and the Fed can’t change this.

        1. “And no matter what they do Biden and the Fed can’t change this.”

          But Bullard & Company feel compelled to try demand destruction via wage suppression. At least Andrew Bailey at the BOE was honest about it in contrast to our super-transparent Fed.

  1. It’s a little worrying when the guy in control can’t stop talking about his “very powerful tools.” Having said that, I feel like Jay took out the jawboning tool today so he could at least put his mouth where his rate hike wasn’t.

  2. LOL- truly a fool’s game for most mere mortals to be able to trade the impact of geopolitics on the US equity markets.
    I so miss when fundamentals mattered.

  3. To digress at little, think about what is going to happen in a week or three when Ukraine and Russia have reached a deal, and Russia says “of course, all this is contingent on full sanctions relief”.

    1. I can’t imagine the cost of rebuilding Ukraine stuff, but that cash will come from somewhere and it will have economic impacts. Let’s assume Russia ends up paying for this for decades, after they go broke. It kinda sets up a repeat of Germany after WWl.

      Nonetheless, in the post pandemic world, with everything so broken everywhere, a pending Russia default doesn’t pair well with 6 rate hikes by comrade Powell. Adding to global illiquidity will create greater instability and contribute to a global recession.

      Low Fed rates really don’t address the larger macro background of bottlenecks and structural employment challenges.

      Back to rebuilding Ukraine, that’ll result in greater commodity pressure and bottlenecks that’ll spill across borders. Then we have a massive flood of refugees who will crash into various economies, requiring massive assistance.

      Raising rates into this storm is asinine and it’ll take away whatever’s left of Fed credibility, then of course, Republicans will step in and make everything wonderful again.

      While I’m here:

      Mr Shevchenko, governor of the National Bank of Ukraine, said that Russia should eventually be made to pay to repair the damage caused during the invasion.

      “The need for money will be huge,” he told the BBC. “It could be fulfilled through loans and grants from multinational organisations and direct help from other countries. However a large share of financing is needed to be obtained as a reparation from the aggressor, including funds that are current…

    2. @jyl I see you are sticking with your Euro (ETF?) guns or maybe not. “in a week or three when Ukraine and Russia have reached a deal, and Russia says ‘of course, all this is contingent on full sanctions relief'”, is just one of an infinity of possible spanners that all the main players could drop into the gears of negotiation. Putin has been pretty clear, so far, that this war is pretty much about borders. Pretty traditional concern of wars really. SSD[D|War]. Look around the world today. There are numerous wars that have been fought for decades/generations over disputed borders. I couldn’t remember them all if my life depended on it. If you throw in low-level conflicts down to mere verbal disputes and posturing over map lines today that would be one big spreadsheet. Do you see Ukraine settling for borders other than pre-Crimea in less than a month? I guess not, but, I’ve heard it said, “anything is possible.” It wouldn’t be a shocker if it comes down to whose side runs out of bullets first. If so, it may fall to U.S. to drive the final stake into the heart of Ukraine. Some would suggest we’ve done worse before. If Putin thinks there is a chance of that he’ll hold on like a bulldog, because, a Russian Police State with Putin as Czar isn’t going to run out bullets and artillery shells in our life times, all other things being equal.

      If I were to spin up a base case narrative with a positive spin that had some reasonable probability of occurring in the next few months/years, and thus foolishly impose the linearity our stories require onto what still looks very much like a messy transitional state (like what occurs in physics between phase state changes), I’d imagine the Markets, in that they reflect the Mind of Man, will ‘just get used to it.’ The war that is. But it applies to almost any state of deprivation or exaltation Homo saps can experience and survive for more than, IDK, a fortnight (a gracious nod to your 1 to 3 week timeframe)? This process of acclimation we’ve seen so often, for so many things, it doesn’t surprise any more. In fact, the only surprise since GFC is how much faster the amnesia’s ROC has progressively become. Ahhhh, you say, indicators then smartypants? Ahhhh, Google search terms? Ahhhh, YouGov, MorningConsult, or any of the other predictive analytics websites that might mention something useful in their (propagandistic (self-promotional) product teaser) blogs? Ahhhh, whatever list of price/ratio lines you think are appropriate? Ahhhh, I’d also say monitor politics more than you might customarily, or, at least subscribe to a couple major newspapers with international bureaus (heisenbergreport.com goes without saying)? Ahhhh, try WarOnTheRocks and Foreign Policy (although Foreign Affairs isn’t bad and it’s about a third the cost)? Read WarOnTheRocks for a few weeks and read the article hyperlinks and you’ll see the ‘wisdom’ of the Market’s daily gyrations on Putin’s and Lavrov’s every utterance lately displays an astounding degree of ignorance or lack of appreciation for where the War’s main actors are ‘coming from.’

      Anyway, I believe my retinas have been radiated with so much blue light their melting. Gute Nacht.

  4. One of the many rabbit holes I’ve explored, one snaking tunnel ended up in a very small place where I discovered piles of ridiculous dragon hoard CPI stuff that I assume is still connected to Nielsen ratings and aggregate data they provide to government guru’s around Earth.

    I think I’ve been banned on this topic before, but it’s a fascinating derivative of inflation measures, especially now when everyone is excited about the destructive nature of inflation.

    As the Fed lays groundwork for building a monument for absurdity it’s worth noting that their data is highly flawed by datasets that by their nature are inaccurate.

    It’s an odd rabbit hole, but it exists, I’ll say no more on that.

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