Powell managed to pull the rug out from under some widely held assumptions.
By Wolf Richter for WOLF STREET.
At the post-meeting press conference today, Fed Chair Jerome Powell managed to pull the rug out from under some widely held assumptions:
- QT could continue even if and when rate cuts begin next year.
- Additional rate hikes are on the table – “hikes,” plural, not just one more, as per dot-plot projections from the last meeting. Plural brings the top of the rates to 6%.
- No automatic pauses between hikes (hike-pause-hike-pause). Rate hikes could happen at any of the remaining three FOMC meetings this year, including at the next meeting in September.
- Inflation not vanquished. The “one good reading” of CPI (June) was nice, but “it’s just one reading as everybody knows. We’ve seen this before in the data.”
Powell’s press conference followed the FOMC announcement of a 25-basis-point rate hike to 5.5% at the top of the range, with plural rate hikes still on the table, rather than just one more (I discussed the details here). Neither the statement nor Powell pronounced “6%,” even though Powell seemed to be itching to, but plural means 6%.
Rate cuts while QT continues “could happen”: He was asked if the Fed will cut rates next year while continuing QT. “That could happen,” he said. He referred to it as “normalization” of rates being cut toward some normal neutral level while the balance sheet gets trimmed to some normal level.
“These are two independent things. The active tool of monetary policy is rates. But you can imagine circumstances in which it would be appropriate to have them working in what might be seen to be different ways, but that wouldn’t be the case.”
Automatic pauses between hikes discarded. “We haven’t made a decision to go to [a rate hike] every other meeting. We’re going meeting by meeting. As we go into each meeting, we ask ourselves the same question. We haven’t made any decisions about any future meetings including the pace at which we consider hiking. But we’re going to be assessing the need for further tightening that may be appropriate,” he said.
Two more rate hikes to 6% over the next three meetings? “So a more gradual pace doesn’t go immediately to every other meeting. It could be two out of three meetings,” he said. And later he added: “I think it’s possible that we would move at consecutive meetings. We’re not taking that off the table. Or we might not. It really depends on what the data tells us.”
September a “live” meeting? “I would say it is certainly possible that we would hike again at the September meeting if the data warranted. And I would also say it’s possible that we would choose to hold steady at that meeting.”
“Keep moving” at “the right pace” amid the “uncertainty”: “It’s not an environment where we want to provide a lot of forward guidance. There’s a lot of uncertainty out there. We just want to keep moving at what we think is the right pace. I do think it makes all the sense in the world to slow down as we now make these finely judged decisions. So that’s what we did.”
“The worst outcome for everyone would be not to deal with inflation now. Not get it done. Whatever the short-term social costs of getting inflation under control, the longer-term social costs of failing to do so are greater. The historical record is very, very clear on that. If you go through a period where inflation expectations are not anchored, where inflation is volatile and interferes with people’s lives and economic activity, that’s the thing we really need to avoid and will avoid,” he said.
People most hurt by inflation: “We think the single most important thing we can do to benefit those very families, especially families at the lower end of the income spectrum, is to get inflation sustainably under control and restore price stability. We think that’s the most important thing we can do and are determined to do that,” he said.
“I would point out the people most hurt by inflation right away are people on a low fixed income. When you are talking about travel or transportation costs, heating costs, clothing, foods, things like that, if you’re just making it through each month on your paycheck and prices go up, you are in trouble right away. Even middle-class people have some resources and can absorb inflation. People in the lower end of the income spectrum have a harder time doing that. So we need to get this done. And the record is clear, if we take too long or if we don’t succeed, the pain will only be greater.”
Resilience of the economy and inflation: “The strength of the economy overall is a good thing. It’s good to see that, of course. You see consumer confidence coming up and things like that. That will support activity going forward. But you’re right though. At the margins, stronger growth could lead over time to higher inflation and that would require an appropriate response for monetary policy. So we’ll be watching that carefully and seeing how it evolves over time,” he said.
The “one good reading” of June CPI: “We did have the one good reading and we welcome that. But it’s just one reading, as everybody knows. We’ve seen this before in the data. Many forecasts call for inflation to remain low, but we just don’t know that until we see the data. So we’ll be focusing on that,” he said. “We’re going to be careful about taking too much signal from a single reading.”
Long way to go, not restrictive enough: “What we see are those pieces of the puzzle coming together and we’re seeing evidence of those things now. But what our eyes are telling us is that policy has not been restrictive enough for long enough to have its full desired effects. So we intend to keep policy restrictive until we’re confident that inflation is coming down sustainably to our 2% target. And we’re prepared to further tighten if that is appropriate. We think the process still probably has a long way to go.”
In his prepared remarks, Powell also mentioned the long way to go: “Inflation has moderated somewhat since the middle of last year. Nonetheless, the process of getting inflation back down to two percent has a long way to go.”
Do more: “We’re going to be looking at the incoming data to inform our decision at the next meeting if we need to do more. If it does tell us to do more, if that’s our view, we will do more.”
All eyes are on core inflation: “We think and most economists think core inflation is a better signal of where headline inflation is going. Headline inflation is affected greatly by volatile energy and food prices. So we would want core inflation to be coming down. Core is signaling where headline is going to go in the future.
“Core inflation is still pretty elevated. There’s reason to think it can come down now, but it’s still quite elevated. So we think we need to stay on task. We think we’re going to need to hold policy at a restricted level for some time, and we need to be prepared to raise further if we think that’s appropriate,” he said.
First rate cut “a full year from now?” “It would depend on a wide range of things. When people are running down rate cuts next year, it is a sense that inflation is coming down, and we’re comfortable it’s coming down and time to start cutting rates. But there’s a lot of uncertainty between what happens in the next meeting cycle let alone the next year, the year after that. So it’s hard to say exactly what happens there.
“Many [FOMC participants] wrote down rate cuts [in the dot plot] for next year…. That’s just going to be a judgment that we have to make then, a full year from now. It will be about how confident we are that inflation is in fact coming down to our two percent goal.”
We’d be “very careful” about cutting rates: “The federal funds rate is at a restrictive level now. So if we see inflation coming down credibly, sustainably, we don’t need to be at a restrictive level any more. We can move back to a neutral level and then below a neutral level at a certain point. We of course would be very careful about that. We’d really want to be sure that inflation is coming down in a sustainable level. I’m not going to try to make a new miracle assessment when and where that would be, but that’s the way I think about it. You’d stop raising long before you got to 2% inflation. And you’d start cutting before you got to 2% inflation too – because we don’t see ourselves getting all the way back to 2% until 2025 or so.”
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