Unfinished Business

The Fed wants “substantially more evidence” that inflation is on a sustainable path lower.

That was the overarching takeaway from Jerome Powell’s press conference on Wednesday, when the Fed capped a difficult year with a 50bps rate hike.

Suffice to say that although the Committee was just as pleased as the next guy and gal with consecutive downside surprises in the CPI series, it’s not near enough. The Fed isn’t pondering a pause at this juncture.

Read more: When Doves Try

Powell seemed somewhat disengaged on Wednesday — distantly agitated, maybe. He parroted familiar talking points almost verbatim, and struggled to find new ways of saying the same thing. (I sympathize.)

He made it abundantly clear that the Fed still intends to keep policy restrictive for an extended period, and was adamant that the Committee doesn’t yet judge the stance of policy to be sufficiently restrictive.

Of course, that went without saying — the new dots tip 75bps in additional hikes, which could mean either a 50bps move in February followed by a single 25bps increment, or three consecutive 25bps moves.

Nick Timiraos, whose articles are at times more important for markets than concurrent Fedspeak, asked if, having hiked 425bps in 10 months, the Fed would now be inclined to approach terminal in more traditional increments.

“You’re mindful of the policy lags. Does that mean you’d be more comfortable probing where the terminal rate is in 25bps increments going forward?” he wondered.

That’s “broadly right,” Powell said. “That’s the idea. It makes a lot of sense to me.” Obviously, he made no promises. “I can’t tell you what the actual size will be,” he told Timiraos.

Steve Liesman needled Powell about the easing in financial conditions over the past two months on the back of higher stocks, falling long-end yields, lower mortgage rates and the weaker dollar. “Is that a problem for the Fed? Do you need to do something about that?” he asked.

“Our focus is not on short-term moves but on persistent moves,” Powell said, before veering off into a discussion about the terminal rate. “We’re not at a sufficiently restrictive policy stance yet. Which is why rates are rising,” he added. Officials’ estimates of the terminal rate could move up or down depending on inflation data, Liesman learned for his trouble.

The New York Times haplessly tried to wrench a commitment out of Powell on the size of forthcoming hikes. He responded with a lengthy non sequitur that dead ended in a somewhat pessimistic take on core services inflation, which he’s been very keen to emphasize recently. Price growth there may “not move down very quickly,” he said. “That’s why we’re writing down those high rates and why we expect they’ll likely remain high for an extended period of time.”

Reuters pointed to the higher unemployment projections and asked why, when considered against the lows, the implied increase wouldn’t count as recessionary.

“I would say that many analysts believe the natural rate of unemployment is elevated at this point. That 4.7% is still a very strong labor market,” he said, misquoting the SEP, which put the jobless rate peak at 4.6%. Companies, he noted, are reluctant to let people go outside of the tech sector. “That doesn’t sound like a labor market that wants to put people out of work,” he continued.

While responding to a question from the Washington Post, Powell clung to the notion that elevated job vacancies leave the door open to a soft landing. “It feels like we have a structural labor shortage out there,” he mused. That may mean the “costs on the unemployment [front] will be less. We’ll see.”

The Financial Times asked how the market should interpret the higher core inflation forecast in 2023. “Does that not suggest the terminal rate should be higher?” a reporter wondered.

“Well, that’s one of the reasons it went up,” Powell said, of the median dot. “What you see is our best estimate as of today to create restrictive policy. That’s the best estimate we [have]. We’ll make another estimate for the next SEP.”

Queried by Axios on market pricing for cuts in the back of next year, Powell said the Fed’s focus “right now [is] on getting policy restrictive enough.” “I wouldn’t see us considering rate cuts until the Committee is confident that inflation is moving down in a sustained way,” he added.

Politico asked if expectations for persistently high wage growth were the primary reason for higher inflation in 2023. To that, Powell insisted the Fed likes wage growth. “It’s not that we don’t want wage increases — we want strong wage increases — we just want them to be consistent with 2% inflation,” he said.

As for why the inflation forecasts for next year are higher now, he explained that “The jump-off point is higher. I don’t think the policy’s having any less effect, we’re just starting from a higher level.”

Maybe. But that begs the question. If “the policy” was effective, the Fed wouldn’t be “starting” 2023 from inflation levels that aren’t materially different from where they were at the beginning of 2022.