“We are prepared to do more if greater monetary restraint is warranted,” Jerome Powell said Wednesday, following the 10th and, quite possibly, the last rate hike of the most aggressive tightening campaign in a generation.
“We are seeing the effects of our policy tightening on demand in housing and investment [but] it will take time for the full effects of monetary restraint” to manifest, especially in inflation, he added.
Powell’s press conference was mostly uneventful. When asked to confirm, explicitly, that the Fed does intend to pause at the June meeting, Powell simply juxtaposed the forward guidance from March with that contained in the May statement. “We’re no longer saying that we ‘anticipate'” additional tightening, he said.
Asked by The New York Times whether Fed staff still anticipates a recession (consistent with what the minutes from March’s policy gathering revealed), Powell indicated the projections are “broadly similar.” And yet, he emphasized that a downturn isn’t his assumption. “Staff’s forecast is not my own most likely case,” he said, on the way to positing a soft landing.
Later, he meekly attempted to tamp down rate-cut speculation: The Committee’s inflation outlook doesn’t support outright easing anytime soon. Markets won’t be convinced, or at least not if “convinced” means pricing out any chance of cuts in the back half of the year.
Asked about the debt ceiling standoff, Powell read from the script. He can’t weigh in on fiscal policy, but a default would put the US in “uncharted territory.” The consequences of the US not paying its bills on time “could be adverse,” he mused. “No one should assume the Fed can protect” the country in that scenario.
He was asked directly about JPMorgan’s acquisition of First Republic and whether he had any concerns about the house of Dimon getting larger. “I don’t have an agenda to see more banking consolidation,” he said. “In terms of JPMorgan buying First Republic, the FDIC runs the process of selling and closing a bank. I really don’t have any comment.”
When pressed further, Powell said it’s “probably good policy not to have the largest banks doing more acquisitions,” but noted that this was an exception, and said the government is obligated to accept bids that minimize the cost to the FDIC.
When asked by the FT if his estimates of the so-called “substitution effect” (wherein credit tightening by banks stands in for rate hikes) have changed, he said it’s “quite impossible to have a precise estimate.” There’s some substitution, but nobody can quantify it, he suggested, despite having tried to quantify it himself in March.
Powell was asked repeatedly whether policy is now “sufficiently restrictive.” He didn’t commit. It’s going to be an “ongoing assessment,” he said. It’s “not possible to say with confidence now.”
He did cite the median from the March SEP in stating the obvious: Rates are now in line with this year’s dot, which generally means that absent further adverse developments on the inflation front, and assuming ongoing evidence of incremental progress on bringing inflation down, rates have peaked.
Nick Timiraos wondered why the Fed felt it necessary to squeeze in one more hike at all. Powell didn’t have a great answer. “We always have to balance the risk of not doing enough with doing too much,” he told Timiraos. “[We] thought 25bps was the right way to balance that.”
Timiraos kept at it, asking if the Fed will know by June whether rates are sufficiently restrictive. Powell delivered a kind of ad hoc survey of macro conditions and policy settings without arriving at a discernible conclusion. “Policy is tight. And you see that. You put the credit tightening on top of that and the QT — we may not be far off, or possibly even at that level,” he ventured.
An attendee from Fox Business actually asked a good question for once. Would the Fed, the inquisitive reporter wondered, accept “prolonged 3% inflation?”
“That’s not what we’re looking for,” Powell said. “We’re not looking to get to 3% and drop our tools. We’re going to be at this for some time.”
Asked how the dual mandate will operate once inflation gets to 3%, Powell said it’d be a more balanced assessment, which is to say it wouldn’t be the de facto, single mandate it’s been for the past year.
When Bloomberg’s Matthew Boesler asked why Powell is confident the US can avoid a recession when Fed staff isn’t, Powell pointed to evidence that tentatively supports the “immaculate disinflation” narrative.
On that point, there is evidence that the labor market is normalizing not through actual job losses, but through the Fed’s efforts to render “extra” job openings superfluous. Openings have fallen 1.644 million over the last three months, and notwithstanding the above-consensus Q1 ECI print, you could argue that wage growth is cooling as a result of fewer vacancies and less churn. ADP said just that on Wednesday.
“There’s just so much demand in the labor market. We’ve raised rates 5%” and the unemployment rate hasn’t gone up, Powell told Boesler. “That would be against history. I fully appreciate that,” he went on, referencing the long odds for the immaculate disinflation story. “It’s possible that this time is different.”
I thought it was sort of ridiculous that the CNBC anchors were egging Senator Warren on right before Powell’s presser. You could have had the TV on mute and still figured out what was being said. I would prefer the Fed is closer to being right, but that seems it would be an accidental outcome at this point.
Busted
It seems you chose your handle with some clear intent. What concerns me is not whether Powell knows what he’s doing. It seems to me that he does know what he’s trying to do and his top priorities aren’t aimed at the most important constituency, us, the people, and the institutions that support us. While the stock market is important, it doesn’t produce any real output. Yet Powell hears the sharp yells of those demanding an immediate boost to the stock market. Powell says he is attacking inflation, but is he? The asides and other explanatory statements he talks about seem to indicate that he has other priorities than he avers. We’ve just had two of the three top bank failures in history, yet we kind of passed over concern for what might be happening here. Everyone seems to want any talk of systemic bank problems to just go away. More whistling past the graveyard. The last time there were rate hikes this large, this fast, was forty years ago and the banking system was different than today. While these days regulation is in many ways more lax and banks are much larger with the ability to do more, especially in derivative markets, accounting rules requiring portfolios to be marked to the market with changes in asset values reported and booked quarterly, has increased pressures on banks to absorb falling asset market values in a way that was not done in the Volcker era. Powell was, pardon the expression, just a kid when that was all going on. Is Powell’s view of “different” mean the same to him as it does to others?
Mr. Lucky,
All of your points are valid ones. The Fed has a hammer (interest rates) to deal with their mandate, and Duct tape (pick your acronym/facility) to deal with the aftermath. Given the complexities you mention, the Fed needs a little help to steer the ship.
There are other parts of our government, that have abdicated their responsibilities to us far more than Powell, and that doesn’t seem like it is going to get solved for anytime soon.
PS – the handle is not specific to anyone person – just highlighting our futility as a species to predict the future.