Powell Delivers 2,400-Word FOMC Statement

Jerome Powell was pretty specific on a number of key points in prepared remarks for an event hosted by the Brookings Institution on Wednesday.

Whether he said anything new is debatable. That’s the thing about Fed tasseography: It’s more art than science. One person’s tradable soundbite is another’s throwaway line. Algos trade key words, not nuance. Ultimately, you’re left with quite a bit of noise and not a lot of signal.

Powell effectively confirmed that December’s rate hike will be 50bps. “The time for moderating the pace of rate increases may come as soon as the December meeting,” he said, before reiterating the message he sought to drive home during his press conference following the November policy gathering. The pace is now less important than the destination, and also less important than the length of time spent clinging to terminal once it’s achieved.

He used the word “restrictive” four times, but consistent with the November meeting minutes, his description of how much higher rates need to go compared to the SEP-implied terminal rate from the September projections wasn’t especially aggressive. “There is considerable uncertainty about what rate will be sufficient,” Powell said. “It seems to me likely that the ultimate level of rates will need to be somewhat higher than thought at the time of the September meeting.”

“Somewhat” can mean a lot of things, but one thing it can’t mean is “a lot.” If “somewhat” means “a lot” now, then we’ll need to alter the dictionary. Of course, in the minds of policymakers, “transitory” meant “years,” so I suppose we do have to account for the possibility that Powell now speaks a different language than the rest of us by virtue of hanging out with too many economists for too long.

Notably, Powell blamed the lion’s share of the gap in labor market participation on “excess retirements,” a somewhat awkward term for retirements above and beyond what population aging models would’ve predicted. Those retirees, Powell suggested, number two million, comprising more than half of the observed labor force shortfall.

If the Fed is looking to explain why so many people might’ve chosen to retire early, a good place to start is the green shaded area in the figure (below), which shows that thanks to the pandemic stock and property bonanza, household wealth exploded by $40 trillion over just seven quarters. “Gains in the stock market and rising house prices in the first two years of the pandemic contributed to an increase in wealth that likely facilitated early retirement for some people,” Powell conceded.

Amusingly, that was an afterthought of sorts — he explained early retirements primarily by reference to “health issues” and the “large” cost of finding new employment for older workers, “given pandemic-related disruptions to the work environment and health concerns.” I’m sorry, but no. I mean, sure, those factors might’ve played a part, but the bottom line is that stocks staged one of the most spectacular rallies in recorded history and home prices rose by $1 trillion or more every, single quarter. Powell minted millions of millionaires out of thin air. Of course they retired.

In 2022, the wealth effect is going into reverse, putting at least some of those recent retirees at risk (as they discover that paper gains are just that). Still, and despite the Fed’s best efforts, Powell admitted that “the data so far do not suggest that excess retirements are likely to unwind because of retirees returning to the labor force.”

He also mentioned slower growth in the working-age population. If the US wants to reverse that, some lawmakers need to drop the xenophobia. Powell cited “a plunge in net immigration” on Wednesday while explaining the riddle of America’s “missing workers.”

Wage growth, he said, is still far too hot to be consistent with the Fed’s inflation goals. He was quick to note that “strong wage growth is a good thing,” but warned that it isn’t sustainable if it’s inconsistent with price stability.

He expressed guarded optimism on housing services inflation, which’ll “probably keep rising well into next year,” but should eventually fall, perhaps in the second half of 2023.

The Fed has itself to blame for rent inflation. At least in part (figure above).

Powell emphasized (again) that Fed officials are “acutely aware that high inflation is imposing significant hardship, straining budgets and shrinking what paychecks will buy.”

Forgive me, but they aren’t “acutely aware.” They’re apprised, but, as I never tire of reminding readers, empathy is impossible. You can’t empathize with someone in whose shoes you’ve never walked. And even if you have walked in their shoes, you still don’t know how they experience the same hardship you experienced. Empathy, in a strictly literal sense of the word, isn’t possible. “There but for the grace of God go I” is about the best we can do. To his credit, Powell has acknowledged that reality on any number of occasions.

As for how long the Fed intends to hold terminal, Powell reiterated that policy will likely be restrictive for “some time.” “History cautions strongly against prematurely loosening policy,” he said, in the penultimate sentence of what, to me anyway, read like a 2,400-word FOMC statement. “We will stay the course until the job is done.”