The Fed will almost surely cut rates “at some point this year,” Jerome Powell told reporters on Wednesday, following the release of a somewhat belabored set of macro-policy projections.
As for the balance sheet, the pace of runoff will likely slow “fairly soon,” Powell said, noting that the Fed intends to avoid triggering money market stress.
CNBC’s Steve Liesman asked Powell to reconcile the higher core inflation forecast for 2024 and stronger growth projections with a rate path that tipped the same three rate cuts telegraphed in the December dot plot. Does that convey a higher tolerance for inflation and/or less of a willingness to slow the economy, Liesman wondered.
Powell didn’t have much to offer other than to say the Fed doesn’t intend to tolerate above-target inflation over the longer run. He emphasized that the Fed’ll get price growth back to 2% “over time.” The Committee’s “committed to that outcome and we will bring it about.”
WaPo‘s Rachel Siegel asked about painfully slow progress on housing inflation. Powell said the Fed’s confident that lower market rents will ultimately show up in measures of shelter inflation “eventually.”
Asked by Nick Timiraos to quantify how much of this year’s early inflation overshoot was attributable to calendar effects, Powell said the Committee needs to be careful about “dismissing data we don’t like.” Still, he said there are reasons to believe seasonal effects impacted January’s inflation report.
Either way, the January-February releases “haven’t really changed the overall story of inflation moving down gradually” on a “sometimes bumpy road towards 2%,” Powell told Timiraos. The Fed, he went on, didn’t overreact to good news last year, and won’t overreact to bad news in 2024.
Another reporter asked if there’s enough data between now and May for the Fed to gain the confidence needed to cut. The answer’s no, but Powell said he didn’t want to talk about the outlook for any specific meeting. Of course, he did just that in January, when he explicitly ruled out a March rate cut, but the reporter was polite enough not to remind him.
The AP wondered about the upward shift in the longer run dot (i.e., the neutral dot). “Is there a real sense that the economy has changed in some way?” Powell downplayed the shift, calling it “modest” “I don’t think we know” that rates will be higher in the longer run, he remarked, before echoing Janet Yellen in noting that rates probably won’t go back to pre-COVID levels either.
The New York Times‘s Jeanna Smialek asked if a stronger labor market would be a reason not to ease as much. Powell referenced the feedback loop between more workers, higher demand and more hiring. “Supply is actually feeding demand” in the labor market, he suggested. “Workers are getting paid and they’re spending.” It’s possible, he said, to have a bigger economy with disinflation. That’s what happened last year, after all. You just need supply-side healing and a bigger labor force. Strong hiring by itself isn’t a reason to hold off on rate cuts, he told Smialek.
Axios asked about financial conditions which, on measures tracked by market participants, are as loose as they were before the Fed started raising rates in March of 2022. Powell plainly didn’t want to talk about it. He said different FCI indicators tell different stories, and claimed that conditions are restrictive where they need to be.
Powell was vague about the balance sheet. The Fed doesn’t want to provide specific guidance regarding the timeline for slowing the pace of asset runoff other than “fairly soon.” The Fed intends to “avoid turbulence” and is carefully watching the indicators which portended the September 2019 repo crisis.
Bloomberg’s Michael McKee queried Powell further on the January and February inflation overshoots: Did those releases “dent” the Committee’s confidence? They “certainly didn’t raise anyone’s confidence,” Powell conceded.
He quickly reiterated that notwithstanding setbacks, the story’s the same. Inflation’s coming down to 2%. But the ride’s bumpy. “Here are some bumps,” he said, referring to the last two months. “Are they more than bumps?”
As I said in a comment to your other Fed article, I was charitable and described Powell as “borderline incoherent” at times. This article encourages me to be more candid: Powell was just plain incoherent at times. Is he speaking in tongues b/c Yellen is in his ear about the interest cost of Federal debt? Is he trying to keep the guy who harassed him on twitter out of the WH? It’s wrong for Powell to conceal the motive underlying his failure to explain the sharp contrast b/n his assessments and implementation of the Fed’s dual mandate before and after Nov 2023…He appears mentally healthy. So what’s going on?
Maybe it doesn’t matter if, when viewed through a historical lens, it’s unwise for Powell and the Fed to encourage risk-taking in markets. Maybe that’s why he doesn’t care about the coherence and consistency of his comments. The Fed is confident they can overcome any economic or market setback. Maybe Powell’s latest stance is simply another manifestation of MMT’s power to solve problems that plagued markets in the past. Although Stephanie Kelton does identify inflation as a problem that will cause the MMT edifice to collapse.
You might be thinking a little too hard about things. I sympathize with parts of your assessment, but then again, if I talk to you on the phone about the economy and then I go out 5 minutes later and buy something I don’t need, is that your fault? Did you “encourage” me? Maybe. Or maybe I just decided I wanted to buy a Ferrari and nothing you said was going to stop me.
I’m not sure I follow you. If you’re referring to my use of the word “encourage,” I simply meant what you wrote caused me to ask myself why the heck I was so charitable about Powell being incoherent; i.e., why I qualified it in a separate comment as “borderline.” I was tip-toeing around what I thought about his comments which didn’t require much thought at all. But it’s certainly accurate that I often think too hard; until my brain burns, on a good day, especially it it’s b/c it’s at work w/ another good mind.
I read once upon a time in la la land when WSJ had decent staunchly non-political anlaysis about the fed’s intentions. I really do not know enough to have a reasonable comment but at least to this pedestrian it seems to ring true more than not when the FED is tightening.
The gist was that the FED is engaged in economic boosterism. That is they want elevated inflation pressures to persist as long as possible and the proximate reason is to expand GDP. The Thesis was that GDP expands in an inflationary push the most. THerefore rather than trying to kill inflation the goal might be better described as trying to ferment a good batch. Therefore they were intent on keeping the bubbles flowing through the trap by periodically withdrawing and re-applying tightening. It is through the analysis of economic elasticities that the strength of the economy can be assessed.
Therefore slight easing at this point after tightening modestly for some time could provide a real time measurement of economic strength and investor proclivities. It also will allow the economy to adjust to the higher interest rate environment allowing an extension of any economic expansion. WHo knows if this thesis is right or not, but it has served me well enough to keep me out of hock.
I will not speculate as to the reason why, but this press conference more than the prior ones made it clear to me the Fed intends to cut, the inflation data would have to surprise to the upside in undeniable magnitude for them to take cuts off the table, today Powell regaled us with a dovish symphonic poem.
Yeah, but we shouldn’t forget that a soft landing is the objective here. Sometimes Powell’s critics talk as though the Fed’s goal is a hard landing. Preemptive cuts have always been part of the plan. I wrote a follow-up, by the way. Here: https://heisenbergreport.com/2024/03/20/a-word-on-jay-powells-failure-to-arrest-the-stock-rally/