“What I’m trying to do is make sure our message is clear: we think we have a ways to go,” Powell said. “Rates have to go higher and stay higher for longer.”
By Wolf Richter for WOLF STREET.
At every single meeting since the initial baby-step in September 2021, the Fed has pivoted further into the hawkish direction. And it happened again today.
The FOMC voted unanimously to raise its target for the federal funds rate by another 75 basis points – the fourth rate hike of this magnitude in a row – to a range between 3.75% and 4.0% – unimaginable a year ago. The rate hike was expected, and had been projected by the Fed at its September meeting.
But then during the press conference, Powell pivoted further into the hawkish direction, and repeatedly, and purposefully, and all heck broke loose in the markets, and he kept hammering on it, and concluded with it, to where there would be no misunderstanding and no misinterpretation.
Today’s rate hike was projected at the FOMC’s September meeting in the projection materials at the time. The “dot plot” indicated at the time that the Fed would raise by another 125 basis points by year end: so by 75 points today (done) and by 50 basis points at its December meeting, which would take the upper end of the range to 4.5%.
But today, Powell put the 50-basis-point rate hike in December in question, and said that the Fed may not slow the pace of the hikes in December, which would mean another 75-basis-point hike in December, which would bring the top end of the target range to 4.75% by yearend.
Instead of slowing the pace of rate hikes in December, the Fed may slow it in January, he said. So what would that be, a 50-basis-point hike in January, on top of a 75-basis-point hike in December? That would push the top end of the range to 5.25%. “It’s likely we’ll have a discussion about that,” he said.
“The Committee is highly attentive to inflation risks,” the statement said. “The Committee is strongly committed to returning inflation to its 2 percent objective,” it said. Powell was just a lot more colorful.
The Fed raised all its five policy rates by 75 basis points:
- Federal funds rate target to a range between 3.75% and 4.0%.
- Interest it pays the banks on reserves, to 3.9%.
- Interest it charges on overnight Repos, to 4.0%.
- Interest it pays on overnight Reverse Repos (RRPs), to 3.8%.
- Primary credit rate it charges banks, to 4.0%.
Quantitative Tightening continues at full speed.
QT will continue at full speed as previously outlined. The Fed considers it an important tool in cracking down on inflation, Powell said at the press conference. This is a tacit admission – which must never be spoken out loud during the press conference, neither by the press nor by Powell – that the huge bout of QE had something to do with this raging inflation, and that this huge bout of QE will now have to be undone.
It’s “very premature” to be even thinking about thinking about pausing the rate hikes?
Powell used the word “premature” three times during the press conference in relationship to “thinking about pausing” and “talking about pausing.
“Let me say this, it is very premature to be thinking about pausing. When they hear ‘lags,’ they think about a pause. It’s very premature in my view to be thinking about or talking about pausing our rate hikes. We have a ways to go. We need ongoing rate hikes to get to that level of restrictive,” he said.
Later he said, “Okay, so I would also say it’s premature to discuss pausing. It’s not something that we’re thinking about. That’s really not a conversation to be had now. We have a ways to go.”
Markets began to tank when…
I had the S&P 500 chart running on the same monitor as the live press conference. Everything was going fine, markets were in the green as Powell was reading his prepared statement at the beginning of the press conference. And then, towards the end of his prepared statement, he read:
“At some point, as I’ve said in the last two press conferences, it will become appropriate to slow the pace of increases, as we approach the level of interest rates that will be sufficiently restrictive to bring inflation down to our 2% goal. There is significant uncertainty around that level of interest rates. Even so, we still have some ways to go, and incoming data since our last meeting suggest that the ultimate level of interest rates will be higher than previously expected.”
This phrase was the moment when markets began to tank, it happened instantly. At 2:35 p.m., after he finished reading that line, the bottom fell out, and the S&P 500 dropped 53 points, in just moments, from 3,894 (green) to 3,839 (deep red).
Then he added: “The historical record cautions strongly against prematurely loosening policy. We will stay the course, until the job is done.” And markets tanked some more.
And then he added and repeated all the other stuff, particularly the thingy about it being “very premature to be thinking about or talking about pausing our rate hikes.” And each time, markets tanked some more.
Ultimately, the S&P 500 ended the day down by 2.5%. And the Nasdaq Composite ended the day down by 3.4%.
Some of Powell’s delectable morsels at the press conference.
How fast, how far (“to higher levels than we thought at the September meeting”), for how long. “The tightening program is addressing three questions,” he said: “The first is, how fast to go. The second is, how high to raise our policy rate. And the third, how long to remain at a restrictive level.”
“So on the first question, how fast to tighten policy. It has been very important that we move expeditiously, and we’ve clearly done so. We’ve moved 3 3/4 percentage points since March, from zero. That’s a fast pace and certainly appropriate given the low level from which we started.”
“To the second question, how high to raise the policy rate. We have to raise to the level that is sufficiently restrictive to bring inflation to 2% target over time. We put that into our post-meeting statement. Because that really does become the important question now, how far to go.
“We think there is some ground to cover before we meet that test. That’s why we say that ongoing rate increases will be appropriate. As I mentioned, incoming data between the meetings, both the strong labor market report but particularly the CPI report, suggest to me that we may move to higher levels than we thought at the September meeting. That level is very uncertain, though. I would say we’re going to find it over time.
“As we move more into restrictive territory, the question of speed becomes less important than the second and third questions. That’s why I’ve said it’s appropriate to slow the pace of increases. So that time is coming. And it may come as soon as the next meeting or the one after that. No decision has been made. It is likely we’ll have a discussion about this at the next meeting.”
“To be clear, let me say again, the question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restrictive, which will be our principal focus.”
Staying the course: “The historical record cautions strongly against prematurely loosening policy. We will stay the course, until the job is done.”
“Rates have to go higher and stay higher for longer.” In terms of a soft landing, “we’ve always said it was going to be difficult. I think to the extent rates have to go higher and stay higher for longer, it becomes harder to see the path. It has narrowed. I would say the path has narrowed over the course of the last year. It’s hard to say.
Federal funds rate above core PCE, the Fed’s yardstick, now at 5.1%: “I think the answer is we’ll want to get the policy rate to a level where the real interest rate [federal funds rate minus core PCE] is positive. We will want to do that. I do not think of it as a single and only touch stone, though…. I wouldn’t say it’s something that is the single dominant thing to look at.”
Will take time to get inflation down due to hot labor market and flush consumers. “I would say a big challenge is the labor market. The labor market is very, very strong. Households, of course, have strong balance sheets. We go into this with a strong labor market, and excess demand in the labor market…. Also, households have strong spending-power built up. So it may take time. It may take resolve and patience. It’s likely to get inflation down. I think you see from our forecasts and others, that it will take some time for inflation to come down. It will take time, we think.”
Overheated housing market: “The housing market was very overheated for a couple of years after the pandemic as demand increased and rates were low. We all know the stories of how overheated the housing market was. Pricing going up, many many bidders, no conditions. The housing market needs to get back into a balance between supply and demand. We’re well aware of what’s going on there.”
Labor market can soften through a decline in job openings: “The broader picture is an overheated labor market where demand exceeds supply. Job creation still exceeds the level that would hold the market where it is. That’s the picture.”
“We do think that given the data that we have, this labor market can soften without having to soften as much as history would indicate through the unemployment channel. It can soften through job openings declining [I discussed the situation of the job openings yesterday]. We think there’s room for that. We won’t know that. That will be discovered empirically.”
To make sure the message is clear: “Our message should be – what I’m trying to do is make sure our message is clear: we think we have a ways to go. We have some ground to cover with interest rates before we get to that level of interest rates we think are sufficiently restrictive. Putting that in a statement and identifying that as a goal is an important step.”
Rates are going to be higher than estimated in September. “We think that the level of rates that we estimated in September … is going to be higher. That has been the pattern [that each meeting gets more hawkish]. That will end when it ends.
Because inflation isn’t coming down. “There’s no sense that inflation is coming down. I have a table of the last 12 months of 12-month readings; there’s really no pattern there, we’re exactly where we were a year ago.”
Commitment to getting this done. “The last thing I’ll say is that I would want people to understand our commitment to getting this done, and to not making the mistake of not doing enough, or the mistake of withdrawing our strong policy and doing that too soon.”
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