You Have One Job

“Restoring price stability is something we have to do,” Jerome Powell said Wednesday, during remarks to reporters following a second consecutive 75bps rate hike from the Fed.

He repeated some version of that (emphatic) line in response to virtually every question. It all comes back to inflation. Everything else is secondary. That much, at least, is clear.

Powell, sounding weary, fielded a painfully predictable list of queries, and generally eschewed the temptation to deviate from what, by now, is a familiar script. “Price stability is the bedrock of the economy,” he told Steve Liesman, who asked if the Fed would “abide” a recession. “Nothing works without price stability.”

Read more: Trapped Fed Goes Big Again With Recession Looming

Powell has become somewhat adept at reconciling the inflation fight, and any attendant increase in joblessness, with the Fed’s employment mandate. “We don’t see it as a tradeoff,” he said Wednesday. Anchored inflation is the only way to achieve the employment mandate “over the longer-term,” he suggested.

Employment is, of course, a lagging indicator and it’s likely to respond even more slowly this cycle than usual given the legacy of the most acute labor shortage in modern American history. Although initial claims have moved higher, Powell said that may be more statistical noise than signal. He pointed to headline payrolls growth in 2022, which has been uniformly robust (figure below).

“This is a very strong labor market,” Powell insisted. “It doesn’t make sense that the economy would be in a recession.”

Asked by CNN how much prospective labor market weakness the Fed would accept before it “pauses or thinks about cutting rates,” Powell obviously declined to provide thresholds, but he did run through a hodgepodge of statistics which, together, suggest the labor market might be shifting “back into balance.”

“It’s only the beginning of an adjustment,” he added, quickly, before moving on to lament the absence of improvement in participation. “There’s some evidence that labor demand may be” normalizing, he said. “Labor supply, not so much.”

He was careful to pivot back to what counts. “We need to see inflation coming down,” he pressed. “That’s not something we can avoid doing. We do think the labor market can adjust.”

Notably, Powell told Liesman that in the Fed’s view, “it’s necessary to have a growth slowdown.” He elaborated: “We need a period of growth below potential to create some slack so that supply can catch up.” The Fed, he said, “expect[s] some slowdown in the labor market.”

The New York Times wondered if the Committee would be inclined to ease up in the event headline inflation, but not necessarily core inflation, moderates. During last month’s press conference, Powell was keen to acknowledge that Main Street doesn’t care about any compositional nuance, especially when food and gas prices are high.

“Core inflation is a better predictor of inflation going forward [and] in ordinary times you’d look through” volatile headline components, he said, on the way to reiterating that these are unusual circumstances. “When sustained supply shocks take place, you have to pay attention” to headline inflation, Powell told the Times. “The public doesn’t differentiate. So you have to pay attention.”

In response to a question from Reuters, Powell delivered an obligatory nod to the soft landing fable — a polite wave to the implausible notion that policy can be calibrated such that demand slows just enough to bring down inflation, but not enough to undercut growth entirely. “We’re not trying to have a recession,” he remarked. “We know that the path [to a soft landing] has clearly narrowed based on events that are out of our control.”

Asked if the Fed would rather risk doing too much than too little when something as crucial as the institution’s credibility is on the line, Powell said the Fed tries “not to make mistakes,” but warned that “the risk of doing too little” likely outweighs the risk of doing too much. He alluded to the potential erosion of Americans’ savings accounts if inflation became entrenched. Doing too little “makes the pain that much greater” down the road, he said. “It’s important that we get this done,” he repeated, pounding the table on the urgency of quelling inflation.

Asked by Bloomberg’s Michael McKee how the Fed will know when policy gets close to where it’s trying to go given well documented lags, Powell said they won’t — know, I mean. He said demand is clearly slowing in Q2, and juxtaposed the situation with the more ambiguous conjuncture that prevailed in Q1, when the economy contracted on paper but many analysts waved the negative print away as meaningless. That position was made less tenable when the final read on first quarter growth included a large downward revision to the personal consumption component. “You pretty clearly see a slowing in demand in the second quarter,” Powell said. “We think that demand is moderating. How much is it moderating? We don’t know.”

Amusingly, he also nodded to the difficultly inherent in trying to tally economic aggregates in the first place. Regular readers might recall my somewhat caustic assessment from a July 10 article, in which I wrote that,

[T]he truth is, it’s impossible to calculate an aggregate measure of economic output for a country of 330 million people. The fact that we try is a testament to ambition or hubris. In many cases, those two things are inseparable.

Powell wasn’t as abrasive, and his point wasn’t to deride statistics. Rather, he seemed intent on reminding the public that the first read on Q2 growth won’t be the last. There are two rounds of revisions. “It’s very hard to [calculate] GDP for the US economy,” he said. “It’s very large.”

Looking ahead, the Fed hasn’t made any decision on the size of future rate hike increments. The June SEP is still a good guide, Powell suggested. As is the case with the ECB, forward guidance is out the window for now.

As for whether (and when) the US economy will ultimately succumb, Powell said the Fed doesn’t render any “judgment” on what counts as a recession. They just judge when one might be necessary, and take steps to make it happen. It’s up to another panel of unelected technocrats to avail themselves of the same hindsight the Fed used to declare inflation a problem to declare the economy impaired.