Powell quotes Volcker, promises to “use our tools forcefully,” take “forceful and rapid steps” to reduce demand “until we are confident the job is done,” though it will bring “pain to households and businesses,” but not doing it will cause “far greater pain.” Hawk city. Finally got through to the markets?
By Wolf Richter for WOLF STREET.
Fed Chair Jerome Powell, in his to-the-point speech today at the economic policy symposium in Jackson Hole, appears to have attempted to pull the rug out from under the tightening-deniers that had been fanning out across the internet, the social media, and the TV circuits over the past few months, with their contorted theories of “pivot” and “rate cuts” and “dovish Fed” or whatever.
These tightening-deniers ranged from hedge-fund managers with a big Twitter presence and research gurus at financial institutions to countless folks trolling comment sections around the internet and the social media. They cobbled together messages based on fragments from the past two FOMC meetings to show that the Fed – despite what the Fed actually said – would soon “pause” the rate hikes or “pivot” to rate cuts, even though the Fed had raised its policy rates four times this year, including twice by 75 basis points, the biggest rate hikes in some of these folks’ lives.
The effect of this widespread high-energy tightening-denier campaign was that financial markets pivoted in mid-June and did the opposite of what the Fed wanted them to do. The Fed relies on the financial markets to transmit its monetary policies to the financial conditions, to tighten them, so that these tighter financial conditions would begin to slow down demand, and thereby remove some of the fuel under inflation.
What these tightening-deniers accomplished instead was that financial conditions loosened since mid-June, with yields falling, spreads narrowing, and stock prices surging in a massive summer rally, which lasted about two months and peaked in mid-August.
But in mid-August, markets did their own pivot, yield rose again, financial conditions tightened a little, and stocks came down some.
And today Powell, in clear and precise language that would be hard to twist into anything different, pulled the rug out from under the remaining tightening-deniers. It was just hawk city.
For the Fed’s monetary policies to have any effect, markets must transmit them via the financial conditions to the actual economy. And the Fed needs to make sure this happens. And today was an effort by Powell to get this job done.
It worked for now. Markets began to absorb the message that Powell was hammering into them: Stocks fell hard and broadly, with the S&P 500 index down 3.4% today, and the Nasdaq Composite down 3.9%, the Dow down over 1,000 points.
Powell invoked three times Paul Volcker, who became legendary as Fed chair by finally cracking down so hard on massive inflation that it triggered the double-dip recession but created decades of falling and relatively low inflation, that have now been squandered.
He quoted Volcker directly, at the height of the Great Inflation in 1979: “Inflation feeds in part on itself, so part of the job of returning to a more stable and more productive economy must be to break the grip of inflationary expectations.”
Powell said that the Fed’s current crackdown on inflation will create “softer labor market conditions,” and “will also bring some pain to households and businesses.”
“These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain,” he said.
His speech was a series of hawkish comments that boil down to this: We’re going to crack down on inflation, and we’re going to “use our tools forcefully” and we’ll take “forceful and rapid steps,” to bring down demand, and there won’t be any “stop” or “pause” in the rake hikes until rates are “sufficiently restrictive” to “return inflation to our 2 percent goal.”
So now I’m waiting for the geniuses at the tightening-denier camp to figure out a way to twist this into “Powell was dovish,” which would be a hoot.
Powell in his own words.
Below are key excerpts of Powell’s speech; they’re finely crafted and fun to read, and some of them are specifically targeting the tightening-deniers (entire speech is here):
“The Federal Open Market Committee’s (FOMC) overarching focus right now is to bring inflation back down to our 2 percent goal.
“Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all.
“The burdens of high inflation fall heaviest on those who are least able to bear them.
“Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance.
“Reducing inflation is likely to require a sustained period of below-trend growth.
“Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.
“These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.
“While the latest economic data have been mixed, in my view our economy continues to show strong underlying momentum. The labor market is particularly strong, but it is clearly out of balance, with demand for workers substantially exceeding the supply of available workers.
“While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down.
“We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2 percent.
“In current circumstances, with inflation running far above 2 percent and the labor market extremely tight, estimates of longer-run neutral are not a place to stop or pause.
“July’s increase in the target range was the second 75 basis point increase in as many meetings, and I said then that another unusually large increase could be appropriate at our next meeting.
“Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook. At some point, as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases [which addresses how tightening-deniers had twisted his words last time: so after September, there will be more rate hikes, but not every rate hike will be 75 basis points].
“Restoring price stability will likely require maintaining a restrictive policy stance for some time.
“The historical record cautions strongly against prematurely loosening policy.
“Our monetary policy deliberations and decisions build on what we have learned about inflation dynamics both from the high and volatile inflation of the 1970s and 1980s, and from the low and stable inflation of the past quarter-century.
“In particular, we are drawing on three important lessons.
“The first lesson is that central banks can and should take responsibility for delivering low and stable inflation.
“Our responsibility to deliver price stability is unconditional.
“It is true that the current high inflation is a global phenomenon, and that many economies around the world face inflation as high or higher than seen here in the United States. It is also true, in my view, that the current high inflation in the United States is the product of strong demand and constrained supply, and that the Fed’s tools work principally on aggregate demand.
“None of this diminishes the Federal Reserve’s responsibility to carry out our assigned task of achieving price stability.
“There is clearly a job to do in moderating demand to better align with supply. We are committed to doing that job.
“The second lesson is that the public’s expectations about future inflation can play an important role in setting the path of inflation over time.
“If the public expects that inflation will remain low and stable over time, then, absent major shocks, it likely will.
“Unfortunately, the same is true of expectations of high and volatile inflation. During the 1970s, as inflation climbed, the anticipation of high inflation became entrenched in the economic decisionmaking of households and businesses. The more inflation rose, the more people came to expect it to remain high, and they built that belief into wage and pricing decisions.
“As former Chairman Paul Volcker put it at the height of the Great Inflation in 1979, ‘Inflation feeds in part on itself, so part of the job of returning to a more stable and more productive economy must be to break the grip of inflationary expectations.’
“Of course, inflation has just about everyone’s attention right now, which highlights a particular risk today: The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched.
“That brings me to the third lesson, which is that we must keep at it until the job is done.
“History shows that the employment costs of bringing down inflation are likely to increase with delay, as high inflation becomes more entrenched in wage and price setting.
“The successful Volcker disinflation in the early 1980s followed multiple failed attempts to lower inflation over the previous 15 years. A lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation and start the process of getting inflation down to the low and stable levels that were the norm until the spring of last year. Our aim is to avoid that outcome by acting with resolve now.
“These lessons are guiding us as we use our tools to bring inflation down.
“We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored. We will keep at it until we are confident the job is done.”
Yup, so let’s see how long it will take for the tightening-deniers to come out and twist this around.
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