Through trial and, hopefully, not too much error, the Fed will discover what degree of monetary restraint counts as “sufficiently restrictive” when it comes to restoring price stability in the US.
That’s according to Jerome Powell who, reading from an iPad on Wednesday, struggled through his scripted opening statement before being interrogated by a press corps out of creative ways to pose the same half-dozen questions.
“We are in a position to proceed carefully,” he said. “Real interest rates are well above mainstream estimates of the long-term neutral rate [and] we intend to hold policy at a restrictive level until we’re confident that inflation is moving down sustainably.”
A period of below-trend growth is still likely if inflation is expected to moderate, he repeated.
The FT wondered why the Fed isn’t yet satisfied that policy is sufficiently restrictive. Powell delivered the obvious rejoinder: Rates were left on hold. Maybe policy is sufficiently restrictive. Maybe it isn’t. “Sufficiently restrictive,” like the neutral rate, can only be identified once it’s achieved.
Asked about the shallower path of prospective 2024 rate cuts as reflected in the new dot plot, Powell reiterated that the SEP “is not a plan,” and suggested that more than anything, the revisions to the dots were a reflection of the better growth outlook.
What was the debate like on Tuesday and Wednesday? WaPo asked.
Powell reminded Rachel Siegel that the decision was unanimous. “It wasn’t like we were arguing,” he said. Rather, this was an SEP meeting, so participants were compelled to write down their forecasts. The Fed is going “meeting by meeting” and will “proceed carefully,” he went on.
Steve Liesman asked about the neutral rate. Specifically, he noted that if you’re going to project a funds rate above the long run rate for four years in a row, it might be time to assess whether the long run rate is in fact higher.
“You only know the neutral rate when you get there,” Powell responded. “It may of course be that the neutral rate has risen.” “You don’t see the median moving, but you do see people moving their” projections, he added, before suggesting that the short-term neutral rate may very well be higher than the model-implied long run rate. That could be “part of the reason why the economy has been more resilient than expected.”
The tradeoff between inflation and real rates (and John Williams’s comments on the subject) came up a number of times. Williams recently opined that if the Fed doesn’t cut rates as inflation falls, policy will mechanically become more restrictive. I’ve argued (and I’m not alone) that you really shouldn’t think about it that way. You have to deflate the policy rate by some measure of forward-looking inflation expectations, not backward-looking realized inflation. Expectations have largely normalized, so the dynamic has probably run its course.
Powell entertained the discussion, but not for long. He quickly defaulted to the “you know ‘sufficiently restrictive’ when you see it” talking point, not a non sequitur exactly, but not an answer either. Pressed by Nick Timiraos on how the Fed would think about policy in the event inflation moderated more quickly than expected, thereby mechanically pushing up real rates, Powell didn’t take the bait. “I can’t answer a hypothetical,” he told Timiraos.
Reuters wondered if the better growth and more benign unemployment outcomes telegraphed by the new SEP suggested the Fed is gaining confidence in the prospects for a painless normalization. Powell said yes, but quickly reiterated that in his view, a softer labor market will still be necessary. He downplayed the SEP, as is his wont. The projections, he said, are “just playing forward the trends we’re seeing.”
Asked if a soft landing is his base case, Powell said no. There were audible giggles from the crowd as he digested the gravity of the question and pondered how to answer it without conjuring headlines he doesn’t want. Headlines like, “Fed Chair Powell Says Soft Landing Most Likely Scenario For US Economy.”
“No.” He paused. “No. I’ve always thought that a soft landing was a plausible outcome [but] this may be decided by factors that are outside of our control at the end of the day. I do think it’s possible,” he said.
Later, Powell chafed when a reporter from Bloomberg mischaracterized his answer. “I was a little surprised to hear you say that a soft landing is not a primary objective,” Craig Torres said. Powell let him finish. And then let him have it. “To begin, a soft landing is our primary objective, and I did not say otherwise” he snapped, his demeanor visibly indignant. “That’s what we’ve been trying to achieve for all this time.”
At one point during the proceedings, while attempting to dissuade the media (and markets) from speculating on rate cuts or reading too much into his remarks and the projections, Powell emphasized just how indeterminate all of this really is. “No one” at the Fed, he said, is going to “look back and say ‘Hey, we made a plan.'”