“The best thing we can do for the US is to fully restore price stability, and not fail in that task, and do it as quickly as possible, but also with the least damage we can.”
By Wolf Richter for WOLF STREET.
On several occasions during today’s post-FOMC-meeting, Powell should have used the Taser that I have exhorted authorities (multiple times) to equip him with. When a reporter asks a repetitive, hypothetical, trick, stupid, manipulative, or unanswerable question, or tries to put words into his mouth, he pulls the Taser out from under the lectern, aims, and ZZZZZAPPP, which would shorten and liven up the press conference. WOLF STREET commenters have offered to “pay” to see this, which would bring in revenues to cover part of the Fed’s massive operating losses, and it would stir up public interest in the FOMC press conference.
Failure to implement my suggestion results in a long and hard-to-follow press conference that I then have to spend hours sorting through to extract the most important points that Powell actually made, in his words.
So here we go.
Not even thinking or talking about rate cuts at all: “The Committee is not thinking about rate cuts right now at all. We are not talking about rate cuts,” Powell said. “The question of rate cuts doesn’t come up, because it’s so important to get that first question as close to right as you can,” Powell said.
“We are still very focused on the first question, which is, have we achieved a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2% over time sustainably? That is the question we are focusing on,” he said.
“The next question will be for how long will we remain restrictive? We said we will keep policy restrictive until we are confident that inflation is on a sustainable path down to 2%. That will be the next question. But honestly right now, we are tightly focused on the first question.”
Not considering slowing QT: “The Committee is not considering changing the pace of the Balance Sheet runoff. That is not something we are considering. I know there are many candidate explanations for why rates have been going up, and QT is certainly on that list, although it could be playing a small effect,” he said.
Incidentally, the Treasury Department today came out with a list of 12 reasons why longer-term yields have shot up, and QT was one of them. Wall Street loathes QT, and they’re throwing all kinds of things at the Fed to get it to back off, including during the press conference. ZZZZZAPPP.
No problem to re-hike after pauses. “I would say the idea it would be difficult to raise again after stopping for a meeting or two is just not right. The Committee will always do what it thinks is needed,” he said.
One of the reasons for the pause. “We have to make monetary policy under great uncertainty about how long the lags are. Trying to get a clear answer and say, I am going to assume this, is really not a good way to do it.
“This is one of the reasons why we have slowed the process down this year, was to give monetary policy time to get into the economy, and it takes time. We know that. You can’t rush it.
“So slowing down is giving us a better sense of how much more we need to do if we need to do more.”
“We’ll probably still be left with some ground to cover to get back to full price stability.” “Since lifting off, we understood there are two processes at work here. One, the unwinding of distortions and demand to the pandemic and responses to the pandemic. The other is restrictive monetary policy, moderating demand and giving the supply side time and space to recover. So, you see those two forces now working together to bring down inflation.
“But it is that first one that can bring down inflation without the need for higher unemployment or slower growth; it’s supply-side improvements like shortages and bottlenecks and that kind of thing going away; it’s getting a significant increase in the size of the labor market now, both from labor force participation and immigration. That is a big supply-side gain that is really helping the economy, and part of why GDP is so high. Because we are getting that supply. So, we welcome that.
“But I think those things will run their course, and we will probably still be left with some ground to cover to get back to full price stability. That is where monetary policy, and what we do with demand, is still going to be important.
What would warrant further tightening: “Evidence of growth persistently above potential, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy,” Powell said in his prepared remarks.
“We are looking at the broader picture, what is happening with our progress toward the 2% inflation goal,” he said in response to a follow-up question. He listed the labor market, financial conditions, and other factors. “So we will look at all those things as we reach a judgment, whether we need to further tighten policy. If we do reach that judgment, we will tighten policy.”
How long would the Fed be OK with 3%-plus inflation? “Progress will probably come in lumps and be bumpy, but we are making progress,” Powell said. “The best thing I could point to would be the September SEP [I discussed this SEP here], where the expectation was that inflation by the end of next year on a 12-month trailing basis would be well into the 2s, and the year after that, further into the 2s. So, historically, that is sort of consistent with the way inflation comes in.
“It does take some time. As you get further and further from those highs, it may actually take a longer time. But the good news is we are making progress. Monetary policy is restrictive. We feel like we are on a path to make more progress, and it is essential that we do.”
Has the surge in long-term yields tightened financial conditions enough yet? The increase in longer-term yields “has contributed to a tightening of broader financial conditions since the summer,” he said.
“Persistent change of broader financial conditions can have implications for the path of monetary policy. In this case the tighter financial conditions we are seeing from higher long-term rates and also from other sources like the stronger dollar and lower equity prices could matter for future rate decisions, as long as two conditions are satisfied.”
“The first is the tighter financial conditions would need to be persistent. And that is something that remains to be seen. But that is critical. Things are fluctuating back-and-forth. That is not what we are looking for. With financial conditions, we are looking for persistent changes that are material.”
“The second thing is that the longer-term rates that have moved up, they can’t simply be a reflection of expected policy moves from us that would then, if we didn’t follow through, come back down.”
“We don’t know how persistent [higher long-term yields] will be. You can see how volatile it is. Different kinds of news will affect the level of rates,” he said.
Wages not a driver of inflation “so far” but that may change: “If you look at the broad range of wages, wage increases have really come down significantly over the course of the last 18 months, to a level where they are substantially closer to that level that would be consistent with 2% inflation over time, making standard assumptions about productivity over time. So, it is much closer than it was,” he said.
“In my thinking, it is not the case that wages have been the principal driver of inflation, so far. Although, as we go forward, as monetary policy becomes more important relative to the supply-side issues I talked about in the unwinding of the pandemic-effects, it may be that the labor market becomes more important over time, too.”
“The best thing we can do for the US is to fully restore price stability.” “People are really suffering under high inflation,” he said. “It is painful for people, particularly people who don’t have a lot of extra financial resources, who are spending most of their income on the essentials of life. So, we know that. That wasn’t new.
“But that did come through very clearly in the conversations we had in York. I walked away from that, thinking that really the best thing we can do for the US is to restore price stability, fully restore price stability, and not fail in that task, and do it as quickly as possible, but also with the least damage we can,” he said.
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