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.