“Clearly, this is an unusually large” rate hike, Jerome Powell said, while speaking to the media following the Fed’s most aggressive policy rate increase since 1994. Increments of 75bps won’t likely “become common,” he remarked.
And yet, Powell was quick to note that another 75bps increment will almost surely be on the table at next month’s meeting. Policymakers, he reiterated, want to see a “series” of monthly declines in the incoming inflation data.
“Why not go for a full percentage point?” a reporter from The New York Times wondered. Powell meandered. “Strong action was warranted at this meeting. We’ve been moving rates up expeditiously,” he said, in a response that wasn’t really a response. “This was about the speed.” “You begin to have more optionality” once you get closer to neutral, he continued.
I’d be remiss not to point out that critics, including former Fed officials, repeatedly implored Powell to consider the optionality argument last year, to no apparent avail.
“We want to see policy at a modestly restrictive level” by the end of 2022, he went on to say, referencing the new dots.
Much of Powell’s press conference was spent discussing the Fed’s role in engineering demand destruction. Of course, he assiduously avoided using the word “destruction,” replacing it with “moderation” and other euphemisms.
“We feel like there’s a role for us in moderating demand,” he told Steve Liesman. The Fed can’t affect commodity prices or do much about “all of the supply-side things,” he added.
Asked by an FT reporter if the US economy was in for more than just “some pain,” Powell called the labor market strong and insisted there’s still “a path” for the Fed to achieve 2% inflation without pushing unemployment sharply higher, even as the new projections showed officials generally believe the jobless rate is likely to rise going forward.
“There’s a path for us to get there,” he said. And then, quickly: “It’s not getting easier.”
It sure isn’t. But there’s some hope to be found in the historically elevated ratio of job openings to Americans counted as unemployed (figure below).
That ratio, which reached 1.99 in March, is a Linus security blanket for officials. To briefly recapitulate, the idea is that if the Fed can moderate demand, millions of unfilled job openings will be rendered superfluous. That, in turn, would allow the labor market to normalize without too many actual job losses.
If that sounds like wishful thinking to you, you’re hardly alone. But the thesis has merit. It’s not implausible. The issue is match efficiency and other pandemic distortions, including the impact of massive wealth gains on the labor force, something Powell didn’t mention.
“You could get to a more normal level” where people are still seeing “healthy” wage growth, but at a rate consistent with 2% inflation, he said. “You could say the same thing in product markets.”
The Washington Post pressed Powell on the possibility that jobs will be lost to the inflation fight. He reminded the reporter that 4.1% unemployment (as projected in the new SEP) would still count as a “historically low level.” “We never seek to put people out of work,” he said, but emphasized that “you cannot have the kind of labor market you want without price stability.” He repeated himself: “We have to go back and establish price stability.”
The Wall Street Journal‘s Nick Timiraos, who tipped the Fed’s inclination to opt for a 75bps move earlier this week, asked if Powell was concerned about the Fed’s credibility. “[We] take it very seriously,” Powell promised. “We don’t take it for granted.”
He was also asked whether the Fed’s guidance is still credible considering both his own repudiation of a 75bps move at last month’s meeting and the fact that officials hadn’t conveyed any inclination to the larger increment ahead of the self-imposed quiet period.
“I’d like to think our guidance is still credible,” Powell said, calling it “an unusual situation to get data during our blackout that changes the decision.” I should note that Powell didn’t really “repudiate” 75bps last month. He just said it wasn’t discussed actively, at the time.
Bloomberg’s Matthew Boesler asked if the Fed was trying to induce a recession. Powell was quick to dispense with that notion, for obvious reasons. “We’re not trying to induce a recession,” he responded, using Boesler’s words so as to leave no room for doubt. “Let’s be clear about that.”
Powell conceded that most Americans care more about headline inflation than core, which is problematic because headline inflation is driven by factors largely beyond the Fed’s control. “Regular people… they don’t know what ‘core’ is. Why would they?” he wondered.
Michael McKee asked if the Fed was willing to “chase” the headline prints. It was a good question. After all, if headline inflation is what counts for regular people, and regular people’s inflation expectations are what ultimately determine whether an inflationary psychology becomes entrenched, a Fed that’s unable to make a dent is an ineffectual Fed.
“We’re responsible for headline inflation. That’s law,” Powell said, with candor, before underscoring policymakers’ dilemma. “We can’t affect commodities [but] we have to be mindful of food [and] energy prices.”
Once again, no one can escape the inevitable. As I wrote last week, the Fed needs to crimp demand for inelastic goods and services. That’s a bleak prospect, but if the rise in inflation is in no small part a function of rising prices for necessities, and if the Fed can’t conjure fuel, food and houses, then how else can they address the problem?
Powell conceded the point without making it explicit. “The areas we can affect are in demand [and] there’s always a risk of going too far,” he told a reporter from Politico.
“Failure isn’t an option,” he said, in the same exchange. “We have to restore price stability. It’s the bedrock of the economy.”