“In principle,” the Fed can cool the labor market and bring supply and demand back into balance without triggering a sharp downturn in the broader economy, Jerome Powell said Wednesday.
He seemed comfortable, for a change, as he spoke to reporters following the largest rate hike in more than two decades.
“We have a good chance to have a soft or soft-ish landing,” he remarked, leaning on a familiar list of talking points including the notion that households still have “excess savings” or, at the least, buffers that are “substantially larger” than they might have been during previous cycles or compared to trend.
The labor market, he said, doesn’t “seem anywhere close to a downturn.” Powell repeatedly cited the ratio of job openings to the number of Americans counted as unemployed. Using the latest JOLTS data, documented here earlier this week, the number is 1.9. That is: There are nearly two jobs for every person counted as unemployed (figure below).
Asked by Reuters what a “good” ratio would be, Powell clarified that the Fed doesn’t have a number in mind. When the rate was 1:1, the Committee “thought that was pretty good,” he ventured.
CNBC’s Steve Liesman asked the question on everyone’s mind: Is it possible the Fed could hike rates 75bps or even a full percentage point at a single meeting.
Powell barely flinched. On this question, at least, he was unequivocal. “75bps is not something the Committee is actively considering,” he said. “50bps increments should be on the table for the next couple of meetings.” The Fed will communicate to the public as deliberations evolve.
Late last month, the perception of policy panic prompted a flurry of bearish trades across the US rates complex, as the combination of Jim Bullard’s 75bps trial balloon, Powell’s endorsement of front-loaded hikes and remarks from Mary Daly played absolute havoc. The surge in demand for 75bps hike tail hedges suggested traders weren’t convinced the front-end selloff had run its course, nor were they convinced enough rate hike premium was built in.
On Wednesday, Powell put the 75bps speculation to bed — or at least for now, boosting equities and bull steepening the curve dramatically. “We wanna see that information,” he went on to tell Liesman, referencing upcoming inflation prints. “It’s a very difficult environment to give forward guidance 60 or 90 days in advance.”
He was keen to note that the Fed “isn’t taking comfort” in two months of slightly cooler-than-expected core inflation (figure below).
Relatedly, Powell was adamant about the need to move policy closer to neutral, albeit while reminding the public that neutral isn’t something the Committee can actually identify with any precision.
“[There’s] not a bright line on the road that tells us when we get there,” he said, in response to a question from Axios. “Neutral is a concept. We won’t hesitate to go beyond neutral,” but there’s a “false precision,” Powell continued, while addressing a reporter from the FT.
Asked by Axios if the Fed sees evidence of a shift in Americans’ inflation psychology, Powell said no, even as he adopted what it’s fair to call his most cautious cadence to date when discussing the point. “We don’t really see strong evidence of that, but that does not in any way make us comfortable,” he emphasized. “We don’t see a wage-price spiral… but we need to move expeditiously. We can’t run that risk.”
One reporter asked about the Fed’s discussion of Russia and China in the statement. Powell suggested officials wanted to communicate that their tools “don’t work on supply socks, they only work on demand.” Both Russia and China are capable of preventing supply chains from healing, he warned. “They’re going to weigh on the process.”
When Politico asked whether the Fed might need to “crimp demand even further” if supply chain issues don’t resolve fast enough to bring inflation down, Powell said the Fed “needs to work on what it can first.”
Reuters attempted to extract the strike price of the Powell put. “Have stocks come down enough? Do you need another leg down?”, a reporter wondered. Powell brushed the question aside. “There are a bunch of channels through which policy works,” he responded. “We don’t focus on any one market. We wouldn’t be targeting any one market or taking a view on whether it’s a good level or bad level.”
When The Washington Post asked what Powell would say to everyday people about a 50bps rate hike and when households can expect the move to impact the price of necessities like food and groceries, he struggled to craft a response.
“Some of us are old enough to have lived through high inflation,” he said. “If you’re a normal economic person, you probably don’t have that much to spend.”
My translation:
“{Fed tools] don’t work on supply shocks, they only work on demand” + “[Fed] needs to work on what it can first” + “We don’t focus on any one market. We wouldn’t be targeting any one market or taking a view on whether it’s a good level or bad level” = Fed willing to suppress demand enough to overcome supply shortage, regardless of whether it pushes equities into a bear market.
“We have a good chance to have a soft or soft-ish landing” = Landing may be hard, no promises.
My conclusion:
The pundits, strategists, and investors trying to predict what the Fed will do by reference to what would or would not be a “policy mistake” need to accept that, for the Fed, the “policy mistake” will be if it fails to break inflation’s back. Investors losing money . . . think “collateral damage”.
H-Man, it appears we are still seeking confluence?
‘If you’re a normal economic person’….. what a lovely way to express how out-of-touch you are with real world problems.
Somewhere along the way I came across someone’s opinion that if you really wanted to know what was going on with the economy, watch the copper/gold futures ratio. And with that was also the opinion that the Federal Reserve is the very last place you’d want to look, because the Fed is totally clueless (and I seem to recall a movie scene where somone—Michael Douglas?—said something similar).
In watching these rate hikes, I recall that in January or February of 2020—just before COVID—the consensus of Philip Tetlock’s Good Judgment Project board was that the Fed would not reduce rates. And that was because Powell was insisting the cuts were over (although my memory could be faulty on that). And then practically overnight they did a complete about face and the overnight rate dropped off a cliff.
And now . . . how long ago was it that Powell was saying that inflation was just transitory?
@Rick Jones
The “about face” in Feb 2020 was understandable, was it not? Should the Fed have held rates unch’d then?
“in January or February of 2020—just before COVID—the consensus of Philip Tetlock’s Good Judgment Project board was that the Fed would not reduce rates. And that was because Powell was insisting the cuts were over (although my memory could be faulty on that). And then practically overnight they did a complete about face and the overnight rate dropped off a cliff.”
I anticipated a relief rally because of all the jawboning and hawkishness leading up to the meeting (which worked!). Why take 75 bps off the table? I had thought perhaps the Fed had become convinced that jawboning alone could tighten FCI without actually doing anything, thereby paving the way for the market to ably digest 50 bp hikes beneath the specter of 75 bp hikes. By taking the latter off the table, he has removed any comfort buffer the jawboning had achieved for the actual 50 bp hikes. This would seem to make the next meeting much more perilous, unless, that is, they plan to repeat the hawkish jawboning again in late May or early June leading into the nest meeting.
If you’re a normal economic person you probably can’t buy Twitter and shoot yourself into space.