Several Fed officials were keen last month to shift the discussion around the policy rate from “how high” to “how long.”
That’s according to the account of the September FOMC meeting, released on Wednesday afternoon.
It’s not exactly new information that policymakers are more focused now on the length of time spent holding terminal than they are on where, exactly, terminal should be. And there’s a very real sense in which the debate around whether to squeeze in one more rate hike in 2023 is entirely asinine. As Jerome Powell would probably concede, 25bps isn’t going to make the difference one way or another. Either the Fed’s efforts thus far have succeeded in engineering a policy stance that’s “sufficiently restrictive” to control inflation or they haven’t. If they haven’t, it’ll take more than one additional 25bps increment to do the job. If they have, and additional tightening is thereby an example of overdoing it, another 25bps isn’t going to be the difference between a soft landing and a deep recession.
I could just leave it at that. And in a perfect world, I would. But this world of ours isn’t perfect (maybe you noticed). We pay people hundreds of thousands of genuine US dollars (millions, even) to sort through after-the-fact accounts of technocrat deliberations because we think sifting through the record might give us an edge when it comes to trading financial instruments. So, instead of doing something worth doing, market participants lost, irretrievably, half an hour of their lives on Wednesday afternoon to fruitless Fed tasseography. If I don’t likewise waste my time (and yours), then I’m derelict in my duties as a chronicler of the meaningless. And I’m not derelict. Well, not in my editorial duties, anyway.
So, what else did Fed officials say during last month’s deliberations? Well, “many” officials said there were downside risks to growth, even as the US economy seemed resilient. An incisive observation, to be sure.
Equally profound was the contention by “most” officials that upside risks to inflation remained. That’s the kind of assessment you can confidently make if you have a PhD in economics. Or if you’ve been to the grocery store lately. Or filled up your gas tank. Or bought a granola bar at a gas station, which I did yesterday for the first time in at least 10 years. My cup holder change didn’t cover it. It was more than $3 with tax. I had to go back to the car and retrieve my debit card to the consternation of some irritable construction workers waiting in line to buy tallboys and Funyuns.
Amusingly, Fed officials “observed” that their “post-meeting communications,” including the cursed dot plot, “would help clarify to the public how participants assessed the likely evolution of the stance of monetary policy.” The SEP is a lot of things, but one thing it’s famously not is helpful. Not to the public and not to anybody else either save maybe short-end traders gambling on the dots.
Other revelations included the perceived desirability among participants of keeping rates restrictive “for some time” even as the rapid pace of tightening since early 2022 affords the Committee the leeway to “proceed carefully” now that the risks are more “two-sided.” Specifically, “many” officials said that,
Even though economic activity had been resilient and the labor market had remained strong, there continued to be downside risks to economic activity and upside risks to the unemployment rate. Such risks included larger-than-anticipated lagged macroeconomic effects from the tightening in financial conditions, the effect of labor union strikes, slowing global growth and continued weakness in the CRE sector. Participants generally noted that it was important to balance the risk of overtightening against the risk of insufficient tightening.
That skewed dovish, but there was no guarantee markets would trade it that way. The only thing more imprecise than economics is Fed tasseography.
There were nods to “data volatility and potential revisions,” and some concerns around “the difficulty” of estimating r-star. Those worries, along with the “highly uncertain” macro environment, “support the case for proceeding carefully” when it comes to any additional policy tightening which may (or may not) prove necessary, the minutes said.
Balance sheet runoff, “several” participants judged, can continue even once rate cuts commence, whenever that is. The SOMA manager described reserve balances as “abundant.”
Headlines will tell you the September FOMC minutes underscored the Committee’s commitment to “higher-for-longer.” That’s true, but when taken in conjunction with the (very) recent shift in officials’ public comments regarding the extent to which the most recent move higher in long-end bond yields could substitute for the final hike tipped by the dot plot, the minutes perhaps suggested the Fed is more cautious than markets were inclined to believe following last month’s meeting.
It’s possible the Fed was playing 3-D chess in September: Let’s see if we can use the SEP to shock markets into doing whatever’s left of the work for us.
