The Fed has reached the lowest level of restrictive policy, Jerome Powell said Wednesday, during remarks to reporters following a third consecutive upsized rate hike.
Although officials eschewed the temptation to raise rates by a full percentage point, fresh projections tipped an aggressive near-term policy path, and updated estimates for economic aggregates showed the Fed is indeed willing to countenance meaningfully slower growth and higher unemployment in pursuit of price stability.
Powell’s suggestion that policy is only just now restrictive, after 300bps of tightening over a very compressed time frame, was notable. The Fed, Powell made clear, still has a ways to go.
Read more: A Hawkish 75?
The Wall Street Journal‘s “Fed whisperer,” Nick Timiraos, wondered just how far the Fed is from its destination. “Do you want to have a policy rate above the underlying inflation rate?” he asked. “Do you have an estimate for where the underlying inflation rate is?”
Powell didn’t take the bait. In fact, he didn’t bite on much Wednesday. The Fed, he told Timiraos, needs to drive rates far enough into restrictive territory to put “meaningful downward pressure on inflation.”
Someone from Reuters pointed out the obvious: The new projections clearly telegraph a 75bps hike in November and a 50bps move in December. “You say it’s meeting-by-meeting but it sure looks like it’s 75-50-25,” the reporter mused.
“You’re right that the median suggests another 125bps in rate increases” by year-end, Powell said, before noting that there’s still a “fairly large group” at the Fed who sees 100bps over the balance of the year. Whether it’s 125bps over the next two meetings or 100, the Fed’s “committed to a restrictive level,” Powell emphasized. And the Committee will proceed “pretty quickly” in pursuit of that.
On Wednesday afternoon, BofA revised their Fed call. The bank now sees 75bps in November, 50bps in December and a pair of 25bps moves in Q1. Their new terminal target range is 4.75-5.0%, up markedly from 4.0-4.25% previously.
Another reporter pointed out that Fed officials see rate cuts as early as 2024, when core inflation may still be marginally above target in 2025, according to the projections. It was a meaningless question. Nobody knows what inflation will be in 2025, so attempting to play “gotcha” with Powell based on a purported “disparity” between the new rate path and a rounding error on an out-year PCE forecast was the very definition of asinine. Powell was generous. “The median forecasts are pretty close,” he said. The projections don’t suggest anything about a “tolerance” for an ongoing inflation overshoot, although I suppose we can forgive reporters for asking. After all, the Fed specifically adopted a policy that countenances overshoots in 2020, just before inflation took off into the stratosphere.
Powell was also asked why the Committee didn’t go with a full-point move given that core inflation appears to show price pressures becoming more entrenched. The Fed, he said, doesn’t want to overreact to any one data point. All anyone needs to know, he suggested, is that inflation is too high and that the Fed is committed to bringing it down.
Bloomberg’s Craig Torres asked why the US economy is so stubborn in the face of aggressive tightening (he used “resilient” instead of “stubborn”). Powell was quick to say that interest-rate sensitive sectors “are showing the effects.” The “obvious example is housing,” he remarked.
But “people have savings,” Powell mused, mentioning the legacy of “government transfers.” There’s “savings out there to support growth,” he added. “States are flush with cash.” The exchange echoed the debate outlined here earlier this week in “Good Things Gone Bad.”
Asked by Bloomberg’s Michael McKee if the “odds favor a recession,” Powell politely declined to assign probabilities to an actual NBER downturn. “I don’t know what the odds are,” he told McKee, but said there’s a “very high likelihood of below-trend growth.”
He continued: “I wish there were a painless way” to bring down inflation “but there isn’t.”
Although Powell said the Fed “certainly” hasn’t given up on the idea that the purportedly necessary increase in unemployment will be “relatively modest,” he reiterated that failing to contain inflation now would only lead to more pain later.
“It’d be nice if there were a way to just wish it away,” he said, of inflation. “But there isn’t.” Price stability, Powell remarked, is “an asset that delivers” for the economy over a long period of time.
It is what is. Hiking into a recession
The intraday chart for the S&P500 is just wow. I bet Powell wishes he never had to do another press conference.
Hard to spin that FOMC meeting bullishly.
1. Effectively brought back forward guidance.
2. That forward guidance for 2023 includes UE up to mid-4s%, GDP growth down to barely 1%, core PCE inflation still over 3%, policy rate 4.6% and up from 2022.
3. Picture is Fed expects it will take better part of years to control inflation, so easing is more than a year away.
4. Press conference had Powell reiterating Jackson Hole message, explicitly calling for falling housing prices, explicitly saying that UE pain will be unavoidable, and ending Q&A early.
5. Only non-hawkish statement was that MBS sales are far off.
Better part of two years, I meant to write.
It is only down from here until year end, growth data will likely deteriorate fast and the last two hikes, even if 50 bps each, will break the camel’s back, it will be a 2018 redux, unless the war in Europe spreads and escalates, which seems more likely by the day, in that case it will be a 2008 redux, if we are lucky.
Better 2008 than 1939.
H-Man, with core at 6.3%, the fed rate has to be higher as in all other inflationary periods in the last 50 years; so assuming core falls to 5%, we need terminal at 5.25% to continue to force inflation down. We are not close.
Currently, fiscal policy at both the Federal and state levels is working against monetary policy. This is ridiculous.
Fiscal policy needs to be adjusted to increase (not decrease) the supply side where needed- such as workforce, housing, oil, etc. November elections in the US might result in a situation where fiscal policies are appropriately supporting, not working against, monetary policies.
This is a global problem in wealthy countries- I am currently traveling in Australia and there are worker shortages everywhere. Our 26 year old, college educated, waitress tonight was an Irish girl who had come to Australia on a work visa. She was given a choice of working on a farm or as a waitress for 88 days and in exchange will be able to stay in Australia for 2 years. She said her opportunities are much better in Australia, and she has already convinced friends from home to follow her. In the US, we need to deal with our ineffectual Immigration policies asap. We should be actively seeking to get the best and brightest before they go to other wealthy countries.
With 8B people on the planet, there are plenty of workers- we just need to get them to the correct spots (and provide some training) to fill job openings.
That is a good idea. However, due to the sentiments of a rather large, arrogant, loud and vociferous segment of the public here in the USA, that idea would only gain traction if the only immigrants allowed to gain entry into the United States were: (1) blond, (2) tall (3) slender (4) blue-eyed (5) and shall we say of Caucasian?, Arian? or Northern European descent?, and decidedly only those who espouse strong Christian religious views, and hence – strongly anti-Semitic or extremely anti-Muslim, etc.
correction: “Aryan”
There is no chance of fiscal anything under a GOP Congress, let alone any sort of policy that entails encouraging immigration. I think quite a few old guard Republicans and/or Indepedents and/or fiscal conservatives who don’t necessarily espouse a strong party affiliation are in denial about where the Republican party’s priorities are in 2022. The agenda is to commandeer state legislatures, roll back secularism on all fronts and push the country towards a radical libertarianism. It is all about the culture wars. All about the culture wars.
Aryan – that’s funny. Aryan is a term used by two classic ancient Indo-Iranian ethnic groups. In Iran itself it was used in the Avesta scriptures to describe homeland (expanse of Aryas) where the Aryans wouldn’t have to deal with the “outsiders.” Of course, the term was later co-opted by the Nazi’s…
FWIW-from the 2020 US census, as a percentage of total population:
White – 59.7%
Black- 12.5%
Hispanic- 18.7%
Asian- 5.8%
Multi- 2.3%
Other – 0.9 %
Here is what the US census projects we will look like in 2060:
White- 44.3%
Black – 13.6%
Hispanic – 27.5%
Asian- 8.9%
Multi – 4.9%
Other – 0.9%
The Millennials and following generations can largely embrace this because they have experienced this and have friends across cultures.
As older generations die off- our country will have the opportunity to be more cohesive.
“Get on board, people”- this train has left the station.