“We’ve raised 425 basis points this year.” Now it’s “not so important how fast we go” but “what the ultimate level is,” and “how long we remain restrictive.”
By Wolf Richter for WOLF STREET.
This has now been the rule for Fed meetings since the fall of 2021, when it stopped brushing off inflation. At every meeting since then, the FOMC pivoted more hawkish than at the prior meeting: Each “dot plot” projected a higher peak interest rate than the prior dot plot, and it projected staying there for longer, and as a result of the higher rates staying there for longer, it projected a higher unemployment rate and lower economic growth. And yet, each time it projected inflation to stick around longer. And the Fed kept hiking its rates to catch up with its rate projections, and with the next dot plot, the goalposts got moved again.
In today’s FOMC meeting, the “dot plot” raised the median projection for the peak federal funds rate by 50 basis points from the prior dot plot, to 5.13% at the mid-point of the target range, meaning a target range of 5.0% to 5.25%.
Of the 19 members who participated in what is officially called the “Summary of Economic Projections” (SEP), 17 saw this peak rate of at least 5.13%, meaning another 75 basis points in hikes. Seven of them saw the mid-point of the federal funds rate rise above 5.38%.
And yet, the goalposts might get moved again. When asked in the press conference, Powell conceded that the projections for the peak rate might be raised again with the next dot plot.
The big focus now, after the fastest rate hikes in four decades, was no longer the size of the rate hikes, but how high to go, and how long to stay there, he said several times to make sure everyone got it.
And despite the financial markets fervent hopes and prayers, there are no rate cuts for 2023 being projected in the SEP. And when asked about that omission, Powell unceremoniously brushed it off. The focus was on how high to go and how long to stay there, he said.
At today’s meeting, the FOMC voted unanimously to raise all five policy rates by 50 basis points, which the Fed had widely telegraphed in recent weeks, and which “is still a historically large increase, and we still have some ways to go,” Powell said at the press conference.
- Federal funds rate target to a range between 4.25% and 4.50%, highest in 15 years.
- Interest it pays the banks on reserves to 4.4%.
- Interest it charges on overnight Repos to 4.5%.
- Interest it pays on overnight Reverse Repos (RRPs) to 4.3%.
- Primary credit rate it charges banks to 4.5%.
Since this rate hike cycle started in March, the Fed has raised its policy rates by 425 basis points – unimaginable earlier this year
And as Powell has been emphasizing – at a recent speech and today at the press conference – inflation is now shifting to “core services” (services without housing), which make up 55% of “core PCE,” which is the Fed’s favored inflation measure. Once inflation is entrenched in core services, it is very tough to wring out, and that’s why rates would have to go higher, and stay there longer, and why inflation may linger longer.
And the primary fuel for inflation in core services is the cost of labor, which is the major cost component of those services. And the labor market has been very tight, and labor costs are surging, and this is fueling the non-housing “core services” inflation.
Some of the other delectable points Powell made at the press conference.
Lower income people suffer the most from inflation, and the Fed knows it: “My colleagues and I are acutely aware that high inflation imposes significant hardship as it erodes purchasing power, especially for those least able to meet the higher costs of essentials like food, housing, and transportation,” he said.
Brushed off the loosening financial conditions, such as the 10-year yield dropping 60 basis points and junk-bond spreads narrowing, despite the Fed’s tightening: “Our focus is not on short-term moves but persistent moves; and many, many things of course move financial conditions over time,” he said. In other words, meh, markets go up and down, but eventually markets will figure this out.
To help markets figure this out, “I would say it’s our judgment today that we’re not at a sufficiently restrictive policy stance yet, which is why we say that we’d expect that ongoing hikes will be appropriate,” he said. And he sent the markets to check out today’s SEP (the dot plot), where 17 of the 19 members saw a peak rate of over 5%, and no one saw a rate cut in 2023. And he added that the goalpost might be moved again in the next SEP, depending on inflation data.
“The most important question now is no longer the speed,” he said when asked about the size of future rate hikes, 25 basis points v. 50 basis points. “We have raised 425 basis points this year, and we’re into restrictive territory. It’s now not so important how fast we go. It’s far more important to think what the ultimate level is.
And then at a certain point, the question will become how long do we remain restrictive,” he said. “The strong view on the committee is we’d need to stay there until we’re really confident that inflation is coming down in a sustained way and we think that will be some time.”
Higher for longer. “There is an expectation really that the services inflation will not move down so quickly, so we’ll have to raise rates higher to go where we want to go. That’s why we’re running down the high rates and why we’re expecting they’ll have to remain high for a time,” he said.
Core CPI still “three times the 2% target.” “Two good monthly [inflation] reports are of course very welcome. But we need to be honest with ourselves that there is inflation. 12-month core inflation is 6% CPI. That’s three times the 2% target. Now it’s good to see progress, but let’s understand we have a long ways to go to get back to price stability,” he said.
“The worst pain would come from a failure to raise rates high enough, and from allowing inflation to become entrenched in the economy so that the ultimate cost of getting it out of the economy would be very high in terms of unemployment, meaning very high unemployment for extended periods of time. The kind of thing that had to happen when inflation got out of control and The Fed didn’t respond aggressively or soon enough in a prior episode 50 years ago,” he said.
Forget this nonsense about changing the 2% inflation target. “Changing our inflation goal is something we’re not thinking about. It’s not something we’re going to think about. We have a 2% inflation goal, and we’ll use our tools to get inflation back to 2%,” he said. “The committee – we’re not considering that, and are not going to consider that under any circumstances. We’re going to keep our inflation target at 2% and use our tools to get inflation back to 2%.”
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