Promises, Promises

Jerome Powell said mostly the “right” things Friday while speaking at a monetary policy conference alongside Ben Bernanke. I’m not sure it was an especially productive use of anyone’s time. Alas.

“Having come this far, we can afford to look at the data and make careful assessments,” Powell said, being careful to avoid language that markets might construe as a pre-commitment vis-à-vis the June FOMC meeting.

Banking sector developments are “contributing to tighter credit conditions” and could impede the economy, he went on. As a result, the Fed “may not need” to raise rates “as much as it would have otherwise” to achieve price stability. The “extent” of that substitution effect “is highly uncertain,” Powell said, recapping the message from last meeting’s press conference.

Although Fed officials have nodded gingerly (or not-so-gingerly in Lorie Logan’s case) in the direction of additional hikes, Powell didn’t appear eager to tilt market pricing one way or another for next month’s policy gathering. In other words, he seemed content with leaving the question open for now.

He paid all the obligatory lip service to inflation remaining far too high, and reiterated that failing to nip it in the bud, à la Fife, would only “prolong” America’s “pain.” It’s possible, Powell said, that additional supply shocks could come calling.

Notably, Powell went out of his way to say the positive supply shock from the globalization era is likely over. Here’s the full quote:

I will say that the positive supply shocks related to globalization probably contributed significantly to the period of low inflation that either ended, or was interrupted by, the onset of the pandemic. I’m thinking there of the vast increase in global labor supply, the development of efficient global supply chains facilitated by technological advances and things like that. And I would say those positive supply shocks do not seem likely to be repeated.

I won’t subject readers to the r-star debate again, but if neutral is higher, it’d square with the economy’s refusal to roll over despite 500bps of rapid hiking. Those interested in Powell’s remarks on the subject can listen here around the 19:00 mark.

To reiterate, what mattered Friday was that Powell didn’t lean overtly in the direction of another hike. There’s been no decision about future policy tightening, he said, after noting that the Fed was expecting to tighten further until recently.

The data supports the view that inflation progress will be slow, and the market-implied policy path (by which Powell meant pricing for cuts in the back half of 2023) remains inconsistent with the Fed’s forecasts.

So, pause or not in June, the Fed is still keen on “higher for longer.”

At one point, Powell quoted Bernanke while sitting next to him. “What a central bank can do is control inflation. And that is true over time, even in the presence of supply shocks.”

Promises, promises.


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