“The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done,” but it’s not done, Powell said: Core services inflation ex-housing has not come down.
By Wolf Richter for WOLF STREET.
At today’s meeting, the FOMC raised its five policy rates by 25 basis points, bringing the upper end of the range to 4.75%, as widely expected. The Fed has now hiked by 450 basis points in 10 months, far more than anyone imagined a year ago. It has also run $500 billion off its balance sheet in six months of QT.
“Ongoing rate increases” will be needed to get rates to be “sufficiently restrictive to return inflation to 2% over time, the statement said, and Powell reiterated the need for “increases” multiple times at the post-meeting press conference. Always plural: “increases,” meaning at least two more rate hikes, which would bring the top end to 5.25%, as projected at the December meeting. Updated projections will be released at the March meeting.
“Shifting to a slower pace [of rate hikes] will better allow the Committee to assess the economy’s progress toward our goals, as we determine the extent of future increases that we require to obtain a sufficiently restrictive stance,” the statement said.
No rate cuts “this year” if economy performs as expected. More than two rate hikes? “We could certainly do that.”
“If the economy performs broadly in line with [the Fed’s] expectations, it will not be appropriate to cut rates this year, to loosen policy this year,” Powell said.
“If we come to the need to move rates up beyond what we said in December, we would certainly do that,” Powell said. “At the same time, if the data comes in the other direction, we will make data-dependent decisions.”
“More work to do.”
“The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done,” Powell said.
“We covered a lot of ground, and the full effects of our rapid tightening so far are yet to be felt. Even so, we have more work to do,” Powell said, a phrase Powell reiterated over and over again – meaning more rate hikes.
“Inflation is running hot,” Powell said, so more work to do. But “we are taking into account long and variable lags” for monetary policy to impact inflation. Hence the slower pace of rate hikes.
“Without price stability, we will not achieve a sustained period of labor market conditions that benefit all,” he said.
“Very premature to declare victory.”
“It would be very premature to declare victory or think we really got this.”
“Our job is to deliver inflation back to target, and we will do that, but I think we will be cautious about declaring victory and sending signals that we think that the game is won.”
“We have a long way to go. It is the early stages of disinflation. It is most welcome to be able to say that, that we are now in disinflation, that is great, but we see that it has to spread through the economy and it will take time.”
“Restoring price stability will likely require maintaining a restrictive stance for some time.”
“Our forecast is that it will take some time and patience, and we will need to keep rates higher for longer.”
The “risk of doing too little”
“I continue to think that it is very difficult to manage the risk of doing too little, and finding out in six or 12 months that we actually were close but didn’t get the job done, and inflation springs back, and we have to go back in, and now you really do worry about expectations getting unanchored and that kind of thing. This is a very difficult risk to manage.
“Whereas, we have no incentive or desire to over-tighten, but if we feel we have gone too far, and inflation is coming down faster than we expect, we have tools that would work on that.
“So, I do think in this situation where we still have the highest inflation in 40 years, the job is not fully done.”
“Labor market remains extremely tight”
“Despite the slowdown in growth the labor market remains extremely tight.”
“Although the pace of job gains has slowed over the past year and nominal wage growth has shown some signs of easing, the labor market continues to be out of balance. Labor demand substantially exceeds the supply of available workers and the labor force participation rate has changed little from a year ago.”
“Reducing inflation is likely to require a period of below-trend growth and softening of labor market conditions.”
About financial conditions loosening since October:
Financial conditions – measures of the credit markets, such as credit spreads, and not stock prices – after tightening substantially last year, began to loosen again in mid-October and unwound some of the tightening that they had done earlier in the year. Financial conditions are tracked by various indices, such as the Chicago Fed’s National Financial Conditions Index (NFCI).
You can see the easing since mid-October that unwound part of the tightening earlier last year (chart via Chicago Fed, red lettering by Wolf Street):
The minutes of the December meeting mentioned this “unwarranted easing of financial conditions,” and pointed it out as a risk that would make it more difficult for the Fed to bring inflation down. Powell was asked a couple of times about that today.
“Financial conditions have tightened significantly over the last year,” he said.
“The financial conditions haven’t changed much from the December meeting [Dec 14] until now.”
“It is important that the markets do reflect the tightening that we are putting in place as we have discussed a couple of times here. There is a difference in perspective by some market measures on how fast inflation will come down. We will have to see.
“I mean I am not going to try to persuade people. I have a different forecast. Our forecast is that it will take some time and patience, and we will need to keep rates higher for longer.”
At another point he said: “I would say that our focus is not on short-term moves but on sustained changes to broader financial conditions, and it is our judgment that we are not yet at a sufficiently restrictive policy stance, which is why we say that we expect ongoing hikes will be appropriate.”
“Of course, many things affect financial conditions, not just our policy. We will take into account overall financial conditions along with many other factors as we set policy.”
“We think we covered a lot of ground, and financial conditions have certainly tightened. I would say we still think there is work to do there.”
Made fun of “market participants” that caused financial conditions to loosen.
“Market participants have a very different job. It is a fine job. It is a great job. In fact, I did that job for years, in one form or another. But we have to deliver that [2% inflation]. So, we are strongly resolved that we will complete this task, because we think it has benefits that will support economic activity, and benefit the public for many, many years.”
Inflation not coming down in “core services ex-housing.”
“We have a sector that represents 56% of the core PCE inflation index, where we don’t see disinflation yet. We don’t see it, it is not happening yet.
“Inflation in core services, ex-housing is still running at 4% on a 6 and 12-month basis, so there is nothing happening there. In the other two sectors [goods and housing], representing less than 50%, I think you now have a story that is credible, coming together, although you don’t yet see disinflation in housing services, but it is in the pipeline, right? So, for the third sector [core services excluding housing] we don’t see anything.”
“It would be very premature to declare victory or think we really got this. Our goal, of course, is to bring inflation down. How do we get that done? There are many factors driving inflation in that sector [core services ex-housing]. They should be coming into play to have the disinflationary process begin in that sector. But so far, we don’t see that. Until we do, we see ourselves as having a lot of work left to do.
To another question on this topic: “We expect to see that disinflation process will be seen, we hope soon, in the core services ex-housing sector I talked about. We don’t see it yet. It is seven or eight different kinds of services, not all of them the same. And we have a sense of what is going on in each of the different subsections. Probably the biggest part of it, probably 60% of that is … sensitive to slack in the economy. So, the labor market will probably be important.”
“We are just telling you we don’t see inflation moving down yet in that large sector [core services ex-housing]. I think we will, fairly soon, but we don’t see it yet.
“Until we do, we have to be honest with ourselves, seeing ourselves as having perhaps more persistent inflation in that sector, which will take longer to get down. We have to complete the job. That is what we are here for.
For your amusement: Reporters’ inane crybaby can’t-you-stop-the-rate-hikes-now questions.
What was hilarious at the press conference today was a slew of crybaby can’t-you-stop-the-rate-hikes questions. They were so funny that we’ll go through some of them here, and you’ll see that Powell should have answered them with: “Stupid question. Next!” Or “I already shot this down twice. Next!”
But as Fed chair, he has to answer them in some polite manner, and you could see his exasperation.
Question: “Why do you think further rate increases are needed? Why not stop here and see what transpires in the coming months before raising rates again?”
Powell should have said: I just explained it, you idiot. But he didn’t.
Question: “Did you or your colleagues discuss the conditions for a pause at this meeting this week?”
Exasperated, Powell said, “the minutes will come out in three weeks and give you a lot of detail.”
Question: ‘Was there discussion today of the possibility of pausing rate increases and then restarting them?”
Powell: “So, the Committee, obviously, did not see this as a time to pause. We judged the appropriate thing to do at this meeting was to raise the Federal funds rate by 25 basis points and we continue to anticipate that ongoing increases in the target range will be appropriate.”
Question: “Would it be possible to take a meeting off for example, and then resume? You know, could you, rather than doing that every meeting, go a little more slowly, take some gaps in between moves?”
Powell: “This is not something that the Committee is thinking about or exploring in any kind of detail.”
Question: “I wonder if you considered the idea of whether or not your understanding of the inflation dynamic may be wrong, and it is possible to achieve these things without raising rates that high….”
The Fed hiked its five policy rates by 25 basis points:
- Federal funds rate target to a range between 4.50% and 4.75%.
- Interest it pays the banks on reserves to 4.65%.
- Interest it charges on overnight Repos to 4.75%.
- Interest it pays on overnight Reverse Repos (RRPs) to 4.55%.
- Primary credit rate it charges banks to 4.75%.
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