Fed to “proceed carefully” with changes to policy stance amid heavy concerns about rising inflation.
By Wolf Richter for WOLF STREET.
Powell’s speech today at the Jackson Hole conference had two major components: Short-term monetary policy and for the long term, the Fed’s new monetary policy framework.
Monetary policy: “shifting balance of risks may warrant adjusting our policy stance,” but “carefully.”
Powell made room for a rate cut in September, as “the balance of risks appears to be shifting” to concerns about the labor market.
But it was tempered with lots of concerns about inflation, including his projection that the 12-month core PCE price index for July, to be released in a week, would accelerate further to 2.9%.
Cutting rates as inflation is accelerating is a delicate affair that could spook the bond market and drive up long-term rates – which is precisely what happened in 2024 when the Fed cut by 100 basis points and long-term yields rose by over 100 basis points.
So Powell laid out a scenario of “carefully” nudging down the policy rate, rather than an aggressive series of rate cuts. He said:
“In the near term, risks to inflation are tilted to the upside, and risks to employment to the downside—a challenging situation. When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate.
“Our policy rate is now 100 basis points closer to neutral than it was a year ago, and the stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance.
“Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”
This “may warrant adjusting our policy stance” was all the market wanted to hear. The text of the speech was released before Powell read it at the conference, and the trading algos reacted to the text instantly, and even before Powell started speaking, stocks jumped and the 10-year yield dropped.
He acknowledged the difficulties for the Fed posed by the mix of weakening labor-market growth and rising inflation.
Part of the labor market equation is the lower supply of labor due to immigration policies. So, “it does not appear that the slowdown in job growth has opened up a large margin of slack in the labor market,” Powell said. This slack in the labor market would show up in higher unemployment rates, for example, but the unemployment rate has remained “historically low” (between 4.0% and 4.2% since May 2024).
He said:
“Labor supply has softened in line with demand, sharply lowering the ‘breakeven’ rate of job creation needed to hold the unemployment rate constant.”
“It is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers. This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.”
But then there was some heavy breathing about inflation:
“It is also possible, however, that the upward pressure on prices from tariffs could spur a more lasting inflation dynamic, and that is a risk to be assessed and managed.”
“One possibility is that workers, who see their real incomes decline because of higher prices, demand and get higher wages from employers, setting off adverse wage–price dynamics. Given that the labor market is not particularly tight and faces increasing downside risks, that outcome does not seem likely.”
“Another possibility is that inflation expectations could move up, dragging actual inflation with them. Inflation has been above our target for more than four years and remains a prominent concern for households and businesses.”
“Come what may, we will not allow a one-time increase in the price level to become an ongoing inflation problem.”
Monetary Policy Framework: “average inflation” targeting is dead.
Over the past months, the Fed conducted an internal review of its monetary policy “framework,” as it vowed to do every five years. This framework is a set of guidelines for the FOMC’s monetary policy decisions. Today, Powell introduced the resulting new “2025 Statement on Longer-Run Goals and Monetary Policy Strategy” that was passed unanimously by the FOMC.
The most important change in the new framework is the elimination of “average inflation” targeting, an odious strategy created in the framework of August 2020, which specified that the Fed would allow inflation to “run moderately above its 2% target” to make up for periods when it ran below the 2% target, to achieve an inflation rate that “averages 2% over time.”
The result of that “average inflation” targeting guideline of August 2020 was the inflation shock.
Inflation began raging at the beginning of 2021, but the Fed continued its near-0% policy and massive QE into early 2022. The Fed didn’t react to raging inflation for 15 months. I called it “the most reckless Fed ever” (google it).
By the time the Fed hiked for the first time in March 2022, bringing its policy rates to 0.25%-0.5%, CPI inflation was already at 8.5%. This was responsible, among other things, for the explosion of home prices (roughly 50% in less than three years), as the Fed’s massive QE, including the purchase of trillions of dollars of MBS, pushed down mortgage rates below 3%, while CPI inflation eventually exceeded 9%. This was the best free money ever. And when money is free, prices no longer matter.
This refusal for 15 months to end these crazed monetary policies of massive QE and near-0% policy rates in face of raging inflation was at least in part brought about by the Fed’s newfangled “average inflation” targeting guideline established in 2020.
In today’s framework, the Fed killed this odious concept of “average inflation” targeting and returned the framework to the previous method of inflation targeting.
Powell said:
“Our revised statement emphasizes our commitment to act forcefully to ensure that longer-term inflation expectations remain well anchored, to the benefit of both sides of our dual mandate.
“It also notes that ‘price stability is essential for a sound and stable economy and supports the well-being of all Americans.’ This theme came through loud and clear at our Fed Listens events. The past five years have been a painful reminder of the hardship that high inflation imposes, especially on those least able to meet the higher costs of necessities.”
Lesson learned.
The 2% target itself remained etched in stone and wasn’t even on the table for the discussions of the new framework, as Powell had said all year during his numerous post-meeting press conferences.
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I think Powell was mainly concerned about the labor market in the vicinity of his chair.
“One possibility is that workers, [AND RETIREES] who see their real incomes decline because of higher prices,” … are forced into/ back into the workforce AND themselves all pitch in to spur the next (RE: current/ ongoing) wave of inflation…
That CONTINUES 50% above target.
With a declared “tight” above neutral rate?
I’m relieved anyway: we haven’t seen the cadre of ATH asset prices in… days!
Guess I’ll put the ole college fund into shmitcoins and exchange them for USDs after they lose another 90% purchasing power over the next decade.
They sure do love the TINA environment!
Poor Pow Pow, must be getting harder and harder to speak from both sides of the orifice especially when you someone constantly publicy bashing you with a giant hatchet..
This delicate balancing act is not easy to pull off even in the best and most supportive environment from others in charge but in times like now, makes you wonder why someone worth hundreds of millions would want to continue to do the job, unless Pow Pow thinks he is going to be the one day remember fondly in the history book, in which case at least to him that legacy is worth more than money and a comfortable retirement..
Most of the elite still think he did a great job. Then again, they’re biased because of their massive asset-holdings. I hear these people say all the time that the inflation was a small price to pay for the quick recovery from the pandemic shutdowns.
It definitely isn’t a “small price to pay” but the price was unknown when the choice was made. Given what was known (and I do mean “known”, not “speculated”) vs the very real and obvious problems of the GFC and Pandemic, it was a reasonable thing to do.
What is “obvious” in retrospect is not what was obvious at the time.
I vehemently disagree with you. First, the price was not unknown, and it was obvious even at the time. Many economists said as much in March and April of 2020. And even if it was unknown at that time, it certainly wasn’t unknown in December of 2020 and after, when Congress and the Fed continued pouring fuel on the fire.
I really don’t understand why otherwise intelligent people defend these clowns.
The Boogieman was going to get us if we didn’t print $4T?
The price of QE was as big an unknown as either of the things you listed and we still don’t know the price and won’t know until it is completely unwound, which will be at least another decade. QE is the most irresponsible thing ever done by the Fed and Congress has been completely derelict in not passing legislation ending this practice.
People say a lot of things and there were economists that believed inflation to be transitory because that’s what history indicated. The fact that they turned out to be wrong doesn’t change that there was no clear future at the time.
You can’t pick-and-choose the evidence based on what did happen.
It’s easy to look at history in reverse and see what is “obvious” but it doesn’t happen in that order. Try reading “Black Swan” for examples.
Brian, I still disagree. I have email and text conversations with friends back at that time saying “Get ready for some massive inflation.”
No one reasonable thought inflation would be transitory, when The Fed printed $4 trillion and Congress deficit spent $5 trillion in “relief.”
They didn’t “turn out to be wrong.” We knew what would happen based on history and science, and I suspect they did as well. They just didn’t care.
Brian
” no clear future at the time.”
Yet, in March of 2021, Powell said “we must unlearn what we know about M2”
Now it is evident that M2 is not the best measure of the money supply, but it had grown to a great degree due to QE and other forces. Inflation exploded two months later.
Now more money without an increase in the supply of goods and services points to what? (Econ 101)
Pretty sure I heard (by a commenter here) that Powell’s net worth was around $45M. Google search says that’s not a bad estimate.
I have neighbors who’ve managed that without the connections. As that other commenter said, that almost seems like evidence he’s NOT corrupt.
The Trump family is up about 3 billion since start of the year. Largely due to Trump’s and Melania’s meme coins, plus stock of Truth Social.
Agreed. He is grooming his Legacy and trying to undo the Trump damage.
Speaking tour (paybacks) to begin soon.
Wolf two questions:
1) during the most recent FOMC meeting the decision was made to hold the federal funds rate constant. Within a couple days, in what seemed like a script made for TV, we received startling information on the state of the labor market, which very much flipped the conventional wisdom, that had until then pointed to the strong labor market as “proof” that there’s no economic slowdown on the way. My question that is this: is it possible that Powell & the FOMC had no advance warning that such drastic adjustments to labor market data were imminent? It seems hard to believe that Powell & Co. would step out on a limb like that, without noticing somebody (at the BLS) behind him, with a chainsaw.
2) if push comes to shove, and the Fed really does need to prioritize either labor and employment or inflation, my intuition is that inflation will capture their attention every time.
After all, labor market weakness inflicts pain on a “few” while inflation brings misery to all. With that said, what side of this very difficult bet would you expect Powell to take?
“is it possible that Powell & the FOMC had no advance warning that such drastic adjustments to labor market data were imminent?”
Not only possible, but certain. The BLS finished the data on the evening of July 31, before publication in the morning of August 1. Trump received this data (the revisions, etc.) on that evening on July 31 before the publication. The White House always get this data on the evening before public release. This we know from what the White House has said. The evening of July 31 is the earliest ANYONE could have gotten then info.
The FOMC meeting ended on July 30, so it certainly didn’t have this info. Trump got the BLS data on the evening of July 31.
This has happened many times before, that sharp revisions days after the FOMC meeting blow up the Fed’s thinking. It happened the other way around after the 50-basis point cut in September, and three weeks later, the spooky labor market data that had caused the monster cut was revised away. Powell has talked about those issues — about making decisions on uncertain data.
“The evening of July 31 is the earliest ANYONE could have gotten then info.”
Unless China has a mole or two at the BLS like they did at the FED for years! You have great faith in the morals of the bureaucrats that always seem to escape jail and end up working on Wall St.
Ms. Cook has been caught red handed committing mortgage fraud.
Did she add a nonexistent 100,00 sq ft to the size of her property ?
Thanks Wolf.
I was also curious to know which risk you think Powell will weigh more heavily, next month: inflation or labor market weakness.
My sense – and your superb reporting on the subject has helped to shape it – is that fighting inflation will win the day.
As you’ve recently explained, services inflation was never tamed (in fact, it’s now back on the rise) post-covid. Add to this the risk of at least some residual consumer price impacts, as new tariffs impose a rapid reordering of international trade, with supply chain impacts that are very difficult to predict.
Given all this, I struggle to see the rationale for favoring the “employment” half of the so-called dual mandate.
I think Powell will (should) hold firm in September – in fact, the FOMC could conceivably even raise the FFR, should next week’s PCE data, and the August CPI reports, suggest winter is coming.
Your thoughts?
Before the next meeting there will be:
1. PCE inflation index for July (next week), and Powell today said that it would be worse than the last one, based on data from CPI and PPI.
2. CPI for August. And who knows how that will turn out.
3. Jobs report for August and JOLTS for July.
If the CPI report is ugly and the jobs report is rosy (which no one will believe), there might be a hawkish cut of 25 basis points, meaning a cut and lots of talk about keeping things were there are going forward until there is more clarity.
If CPI is tame and jobs weak, there might be a dovish cut of 25 basis points, and more cuts on the horizon, with a couple of dissenters arguing for a 50-basis point cut.
If there is a lot of sudden ugliness in the labor market until then, there might be a 50-basis-point cut.
A consistent strong surge of inflation going into 2026 could put rate hikes back on the table next year. But it would have to be strong and consistent. I don’t know how likely that is.
Trump is going to remake the Fed by hook or crook, but if inflation resurges, Trump is going to have a huge problem on his hands and will likely blame the Fed and let the Fed do its job to get inflation back down.
To be honest, I’m surprised they have held out this long. They have been under relentless attack. Kugler already quit to escape the attacks. It’s just brutal being in a job where the President hounds you personally in public every day, and uses the powers of the federal government to go after you personally if you don’t do what he wants you to do. The last eight months were hell for these people. Powell kept his cool though, and I admire that. I’m way too much of a loose cannon to swallow this kind of stuff silently every day.
A perfect storm is brewing that will hit with full force by next spring or early summer. Rate cuts will forcefully add some 100 mph inflation winds to the tariff tax pass-through to consumers, and the immigration crackdown precipitated worker shortages. All of this just in time to piss off voters enmasse heading into the midterm election. Timing’s everything!
I’m not too impressed with the FED and their massive contribution to America’s debt load and other financial problems. Their insane QE policy championed by previous FED chairmen drove interest rates down to near zero and QE contaminated the rates for long bonds. When they bought mortgages (under Powell) by the trillions, they corrupted not only interest rates, but corrupted the house and condo market, and people are now trapped because they don’t want to exchange their 2.7% mortgage for a 7% mortgage. Market forces should determine the cost of money, not political appointees on the Open Market Committee. For decades the FED has set up the United States for massive downturns because of bubbles in housing, stocks and debt. And our $37 trillion in debt will go to $60 trillion in ten years…if we make it that long without crashing the economy.
Just wait until Trump gets his hawk into that slot 🤣
Inflation above the manufactured target rate of 2% for four years now.
2% target trend line is 16 pts below where we are now.
Powell says dont worry, tariff impact will only be a one time event..
All one needs to look at is the St Louis Fed PCE chart and ask…
“Is this a victory over inflation OR is this a victory FOR inflation”?
(the chart is straight up to the upper right hand corner)
I agree, although the Fed only owns like 25% or something of agency mortgage-backed securities, meaning that the other 75% are owned by idiots who bought those 2.7% 30 year obligations.
The Fed certainly had help in their stupidity.
If we all know employment data gets revised and adjusted then why in the name of god you schedule your FOMC meeting 2 days before the data release when you know there will be adjustments and there is unreasonable person sitting in WH with his own agenda Please don’t give me BS about these dates are scheduled well in advance and can’t change. It’s not a NASA rocket launch to mars or some other planets where you have narrowest window of time. Morons all over the place.
FOMC meetings are scheduled in about the same week of the year, eight times a year, every year. Some of the data reports come right before the meeting, or the day of the meeting, and others come out right afterwards. And some are a good distance from the meetings. That’s just how it works out. People make conspiracy theories out of everything. All that will do is land you on my moderation list because I’m tired of people abusing my site to spread this toxic BS.
The timing of these meetings has earned praise from communications directors across the board. By allowing the Federal Reserve several weeks before responding to key reports, it creates space to gauge sentiment and determine thoughtful next steps. In a climate of uncertainty, I’m grateful for the measured approach and absence of knee-jerk reactions.
Inflation will be the key because of reasons you state inflation really hits the btm 80 percent
Spiking the punch bowl! Stocks reach an all time high! Baby, let’s party like it’s 1929 again!
Green line g9es up from speech given from a government appointed official. Freesest market ever!
Well of course stocks are going to go up.
I sold a ton back in December after they said they were going to holddddddd… and then April happened.
The question now is how long can this boost last with whatever monster lurking in the shadows. which is the whole reason why they are cutting.
Kind of what I am wondering
Is the “long and variable” lag from monetary policy about to emerge from the muck?
Or is it blue skies and tailwinds from here?
There certainly is enough “weirdness” and anecdotal stuff coming out about the economy. Frozen housing market that can’t go on forever. Anecdotal stories about job market challenges. Sudden serious negative revisions in job numbers. Followed by shocking PPI increases. So many canaries in the coal mine (Las Vegas tourism slump, frozen RV market, etc ) But overall things are great, with all official statistics showing rising wages, stable employment, with some rising prices. And who can ignore that roaring stock market.
I’m not convinced the stock market means much of anything anymore beyond how convinced the rich are that the government will “do whatever it takes.”
A drop in rates could push the lag up to November.
Why work, free money.
No wonder people like the NY mayoral candidate gets so much support.
“…to wreck less, or to be reckless, that is the question…” (…with great apologies to the Bard…).
may we all find a better day.
They killed “average inflation targeting” because to maintain an average of 2% would require going below 2% now. So basically it’s an admission that the entire thing was a fraud.
No. It was always a one-way average from get go. There was nothing in the 2020 framework about letting in inflation go below 2%. Inflation had been below target for about 10 years, and average inflation targeting was supposed to have made up with higher inflation for the 10 years of below 2% inflation.
Well there are statements all over their website and in their releases claiming that the purpose of FAIT was that they were seeking to achieve an average inflation rate of 2% over time. So was that true? Is or was that their intention? Because I’m not a mathematician or anything but I don’t think you can have a 2% floor and a 2% average at the same time unless you get really lucky.
You’re twisting the 2020 document around to fit your narrative.
So with the notion of never letting inflation go below 2% …..
if inflation was up 25% in a few years, then went to 1.9% YOY, that would trigger a rate cut?
That doesnt seem right, does it? (If fighting inflation is the real goal)
Fully agree. It should not be a one way ratchet. An average of 2% doesn’t make sense unless you are willing to tolerate some years of deflation to make up for too much inflation.
” Inflation had been below target for about 10 years,”
but as I recall, Fed Funds were below the inflation rate, even then.
So dollar holders get hurt in all circumstances.
Inflation 9%, Fed Funds 5.25
Inflation 1.5% Fed Funds .5%
Quick to cut, slow to raise.
IMO
According to history books on the fed the target has been moving between 1-3% since their founding.
Why did the FOMC cut by 100 basis points in the fall of 2024 and now make this statement? They would have been way head of the curve by now if they had been methodically cutting by 25 basis points at a time.
“Another possibility is that inflation expectations could move up, dragging actual inflation with them. Inflation has been above our target for more than four years and remains a prominent concern for households and businesses.”
My opinion, attempted election interference.
–Geezer
Powell is trying to save his legacy and undo the damage Trump has cast upon his name.
According to the WSJ, “….the Fed said it would allow inflation to run modestly above its 2% target for periods to make up for times when it had fallen short.”
NOTICE, that door doesnt swing the other way……
Why cant rates be higher longer even though inflation is down to 2% so as to “…make up for times…” when rates werent high enough?
Why is there never a mention of the 2% target trend line, which currently is about 16 pts below where prices are currently? By the Fed’s own metrics of 2% acceptability, we are at UNACCEPTABLE price levels.
“According to the WSJ, “….the Fed said it would allow inflation to run modestly above its 2% target for periods to make up for times when it had fallen short.””
That’s what the new framework killed. The quote you posted describes the 2020 framework.
“Powell is trying to save his legacy and undo the damage Trump has cast upon his name.”
What legacy would that be? He darn near single handedly created the biggest housing bubble in US history!
Except that the elite who control the media and government control the narrative that creates the “legacy,” and they believe and say he did a great job in preventing a catastrophic crash.
Powell’s legacy is to be the guy who dumped 2 trillion dollars into a housing market sitting at about double its long run inflation adjusted average and refused to turn off the spigots even as real interest rates approached negative 6 or 7 percent. He is an incompetent and a fraud and the history books won’t be kind to him no matter what he does now.
I agree and hope you are right.
The Federal Reserve has been doing QT (Quantatative Tightening) which means turning off the spigots and tightening money for many years and has shrunk the Federal Reserve balance sheet quite considerably which has been covered here in superb detail.
Jerome Powell is an excellent and very thoughtful and moderate Chairman of the Federal Reserve and is one of twelve members of the FOMC which very prudently and carefully deliberates over and makes all policy interest rate decisions.
LOL! Oh man, thank you! I needed a good laugh! 😂
Seems in line with the Greenspan-Bernanke-Yellen tradition. Good old “wealth effect” macroprudential hocus pocus. Unending emergencies demand refreshing the pig’s lipstick. We can now call it “abundance!” Get your own button soon, world striding consumers!
Because my friend, it is a rigged game. The sooner you understand this, the better off you will be. Invest accordingly.
He’s definitely talking out of both ends. If it was me and, like him, I see a hike in prices, although just one time hit but I see the unemployment number will remain low, I don’t hike. I die on the unemployment number staying low (by his reasoning) and the knowledge that the next Fed or sooner, Trump is dropping the rate to 1%.
The bullying worked. Bad precedent. Bottom line in spite of Powell’s comments — Unemployment is historically rock bottom, and inflation is accelerating rapidly. Hopefully, the ensuing stock market mania and loosening of financial conditions over the next 20 days will force the FOMC to come to their senses.
Nope. The BS bullying did not ‘work’ at all and the FOMC will keep policy interest rates unchanged if it sees continued inflation which is exactly what Jerome Powell clearly stated again today.
The new head of the BLS, from the Heritage Foundation, will ensure reported inflation numbers are tame going forward. There will be at least a 25 basis point cut in Sept.
If the bond market sniffs out that the CPI numbers are being messed with to push down CPI, it will just go ahead and blow out.
On the other hand, there are many ways to speed up the ongoing modernization of the data collection. BLS has been doing that for many years, but it’s a government agency that changes its processes at a glacial pace. Among those modernization efforts was the shift about four years ago from surveys of new vehicle dealers (old way) to JD Power data. JD Power gets actual transaction data from new vehicle dealers – so not only prices of sold units, but also volume, and some details. This was a very good shift, and it accurately captured the price explosion during the pandemic, and I reported about the shift at the time, but it was years in the making. I have no idea why it took so long to make this shift. JD Power has been getting dealers’ actual transaction data since I was in the business in the 1990s. BLS also gets cash register data from NielsenIQ. But there is a long way to go in the modernization process. The health insurance CPI is hopelessly screwed up, the entire process is screwed and needs to be thrown out. To find some of my articles on this, google: health insurance cpi chickenshit.
I’m all for modernizing data collection away from surveys. And maybe a new head can kick some institutional butt and speed it up.
But if the purpose or effect is to artificially repress CPI, the bond market is going to figure this out and have a hissy-fit like you won’t believe.
Sure, if inflation were 20% and the BLS reports 2%, that would be easily sniffed out.
3% vs. 2.5%? Not likely. There are many ways to calculate inflation, and even minor changes to weights & retroactive PCE data revisions can change a few tenths here & there.
But it makes a huge difference for policy. You can justify a rate cut with 2.5% & a “weakening labor market.” With 3% it’s harder.
if they’re doing it willfully and systematically, someone will leak it within about the first day.
Jerome Powell quote by Mr. Wolf: “policy rate is now 100 basis points closer to neutral than it was a year ago.” For the mathematics inclined, Powell did not give a direction higher or lower on the number line; i.e., this quote is the mathematical “absolute value,” the mathematic symbol being two vertical lines. Therefore, no correct information was actually provided.
“Neutral” is a theoretical concept, no one knows where “neutral” is, there is no absolute value of “neutral,” and people have different opinions and formulas as to where neutral may be. Powell also said that neutral is now likely higher than it was before the pandemic.
Seems very plausible there is just no way to balance inflation and employment but that is the box they have created. Fundamental paradigm shifts need to happen, imo, especially in the area of profit driven necessary services. Not really possible however in a very individualist society. Seems very plausible they will lower interest rates, it won’t help anything more than stock markets and lower short term treasury rates. Not clear it would boost employment given the continuous goal to reduce labor costs, but certainly no guarantee it would boost economic growth or at least in a way that benefits most.
The fed only has so much power. What we could do instead is not have inflationary government policy (legal immigration reform to bring in young works to help out our increasingly worrisome dependency ratio, getting ahead of social security shortfalls early, getting the deficit in check through increased revenue [asset prices tell me we’ve got a group of citizens with plenty of potential revenue that don’t even know what to do with the money they are swimming in]).
Pretty much everything I mentioned is political suicide in the US.
So we’ll just do it inefficiently though increasingly higher borrowing rates until the Government is forced to cut spending and raise revenue.
Kudos to Evan for realizing the Fed only has so much power. Others here seem to think the FED is somehow all powerful. At some point, taxing the rich will be necessary (politics).
Wolf wrote: “If the bond market sniffs out that the CPI numbers are being messed with to push down CPI, it will just go ahead and blow out.”
Even Wolf seems to be realizing the FED by itself is not all powerful. Here he sounds a lot like the Robert Prechter and the Elliot Wave crowd: “Mr. Market sets the interest rates, and the FED follows them up and down.”
It is difficult to separate politics from the economy. That is why it used to be a part of philosophy called “Political Economy”.
The Phillips curve was denigrated in the 60’s, as the balancing act was given up by using interest rates to control the money supply in 1965.
No one in his right mind should believe the BLS jobs numbers. I don’t mind reasonable revisions, but the last revisions were freaking ridiculous. Sure there are other measures of the labor force, like JOLTS, but the BLS numbers were the gold standard. They are now the sh_t standard. I wonder how Powell can get any reliable idea on what is happening with the labor force.
Remember when the Fed last dropped 50 bp in one meeting? They $#%& in their pants when they saw a jobs numbers report, which turned out to be wrong. We will probably see this again.
On the other hand, the inflation numbers seem fairly reliable and show a consistent uptrend in inflation.
So the Fed should go ahead and cut one, or two or three times. I look forward to 3 month treasury yields back to over 5% next year. But then I would have to start worrying about IRMAA again. What’s IRMAA? Don’t ask.
The FOMC may decide to increase their policy rates as unemployment stays low and constant and inflation rises significantly ahead.
You should be looking for an opportunity to buy bonds in the next couple of months as inflation will be lower next year.
Misery loves company(IRMAA). I avoided 2026 IRMAA managing 2024 interest income buying T-bills that matured in 2025. I figured interest income would drop in 2025 due to lower rates. In 2026 RMD’s start for me. Hoping that Social Security will become tax free by 2026. Who knows however, if IRMAA would continue to be calculated on the taxable portion of Social Security.
The Fed views asset inflation as good. See Greenspan’s “wealth effect”. Wage inflation is viewed as dangerous by the Fed however and will not be accepted for long.
The wealth effect needs to go the same way MMT did.
and to further “what used to be”…..
Long ago and in a land far away…..
The Fed was bound to promote “stable prices”
Full employment was defined as under 5% unemployment
Now 2% inflation is grand!
and 4.5% unemployment is a problem.
Goal post moving.
Amazing times to live thru!
And I see my 🥛 did not spoil.
I question if cutting the Fed fund rate will do anything other than help in the short-term, despite the high rates there’s been record spending in AI where every CEO is salivating at the thought of laying off their entire workforce, a housing bubble too stubborn to pop, and just a very resilient economy. I think it is being tested too much with the federal workforce downsizing, the trickle of tech layoffs as the AI hype dies down (or even the layoffs caused by AI), the tariffs, and the immigration crackdown. Mortgage rates don’t care about what the Fed has to say, and the federal debt continues to skyrocket. It’s definitely a much more grim outlook than what we had exactly last year, but somehow the economy has stayed strong. I still have serious doubts about how this year will end, will the S&P somehow finish 15-20% three years in a row? Or will the music finally stop?
Currently on Kalshi, the odds are 77% for a September rate cut and only 20% for maintain. I’m tempted to put some money on maintain. It could be a good payout. But I have pretty much been wrong about everything the last ten years. And who can trust central bankers to do the right thing. Would sure be funny if Powell gave Trump the finger and hiked!
The folks over at Kalshi appear to be phenomenally stupid and clueless.
So you think it’s a good bet?!
Kalshi just follows the far more liquid futures market, specifically CME federal funds futures. If its pricing were dramatically different, there would be arbitrage opportunities, which of course do not exist.
/ZQU25 last price was 95.76, which is about 75% of the way from 95.67 (hold) to 95.79 (-0.25% in Sep.) This is what Wall St is betting on, not Kalshi.
Large businesses like Walmart and Apple have said that they have been absorbing the tariff costs, which is probably why some of it is not showing up in CPI. Small businesses however are passing them on to consumers since they can’t absorb it.
The labor market has been weak for some time–look at all the layoffs especially in tech and now even government jobs. Who wants to buy a house when they could get laid off at any time as it happened in 2008? Dropping mortgage rates can only help housing so much.
By the time inflation really takes off Powell will probably be gone so it will be someone else’s problem.
The 30 year mortgage really hasn’t gone down much at all. It’s been between 6.5% and 7% for the past year or so. None of that will move the needle when prices are based on 3-4% rates.
In 2024, Powell gave in on Jackson hole. He did jumbo cut of 50BP and then 25 25 each. Later we came to know Labor market risk was false alarm.
Today also he gave in to Wall St. Sure, blah blah disclaimers but that has not much weight when you kind of say “May warrant adjustment”.
If he was serious about inflation, he would have stood ground. We are waiting for more data for Labor and Inflation. When you are not sure you say you are sure.
Even many former FED governors were surprised at his comments.
FED sold us (common Americans) once again..
MW: The stock market soared following Fed Chair Powell’s speech. Why it might just be a ‘late-summer rally.’
Sandeep
“If he was serious about inflation, he would…”
Labor market growth has weakened sharply. Inflation is quite a bit below the Fed’s policy rates, and there is room to cut. And the Fed has a dual mandate. It has to look at both: jobs and inflation. Powell made that clear, and everyone knows that.
I understand that retirees don’t not care about the job market and are solely focused on inflation, which is literally eating their lunch. But the Fed also has to look at jobs. Dual mandate.
Does job growth mean new jobs after taking into account jobs that were lost, or actual new jobs? I guess my question is whether jobs can continually increase, or is there a theoretical limit?
Job growth, labor market growth…. whatever you call it always means net growth: higher employment now than a month ago.
When employment is lower this month than in the prior month, that job growth figure will be negative; it will be a decline. And that happens during recessions.
Over the past three months, net employment growth was positive but the net increases were relatively small. So each month, employment was higher than any time before and set a new record, but the growth was smaller than normal.
In terms of your last question: Right now, with the crackdown on illegal immigration, the influx into the labor force is a lot smaller, and in theory, as job growth continues, unemployment should shrink and wages should rise in a tighter labor market. At some point, job growth will run into a limit because it’s too hard to find new workers. But that’s just a theoretical limit. There are still 7 million people looking for work in the US. So we’re not anywhere near that.
Wolf, one thing I’m puzzled about is how the FED factors in demographics with the labor market. We have boomers retiring by the thousands every day. The immigration spigot has been seemingly reduced to a trickle. In this environment, how could job growth happen? We can’t fabricate 25 year olds and 50 year olds to replace the retiring folks. This is a supply issue, and growth cannot happen unless jobs (i.e., pay) is enough to bring folks sitting out of the labor market into it. And that could happen in an environment where people are salivating at the offered wages, or where economic conditions are so tight that people are essentially forced to return to work in order to pay for obligations/lifestyle. Alternatively, the immigration gates can open.
So with the above assumptions, why on earth would the FED cut rates with inflation above the 2% target? In the interim, I’m going to read through some of your articles about the labor market to try to understand better. I’m curious to learn the answers to TSonder’s questions.
It’s interesting to note the “dual mandate” is largely unique to the U.S., among major central banks.
Most major central banks only have inflation mandates, or have inflation as a primary objective & employment/growth as a secondary objective once price stability is attained. But this hasn’t stopped the BOE, BOJ & other CBs from being more dovish, despite inflation running above 3% in the economies they manage.
Wolf man – you know this as well as me, or anyone else with half a brain does – the Fed ‘setting’ interest rates is a form of price fixing. The interest rate is the cost of (borrowing) money. Why should Pow-Pow, or t- Rump or even Bozo the Clown decide what the price of borrowing money is?
The free market (the bond market) is supposed to determine the cost of borrowing money. It seems that Pow-Pow is being bullied into saying a rate cut is likely, or at least a possibility. The funny thing is this – the people who are putting on the pressure are the borrowers. OF COURSE the borrowers would want lower rates. The deadbeat borrowers want lower rates.
The sad thing is this – rate cuts will cause more inflation and weaken the already weak dollar. That will hurt the middle and low class. Inflation has ALREADY kicked my
as*. No joke
The Fed fixes prices for short-term funding, such as overnight repo rates. It doesn’t fix prices in the longer-term bond market unless it does QE, and now it does QT. It’s the long-term yields that matter the most. And last year when the Fed cut by 100 basis points, long-term yields, including mortgage rates, soared by over 100 basis points. So there’s your theory of price fixing.
Labor market growth is weakening. And the Fed has a dual mandate. It has to look at both.
If the FED cuts short terms rates, it means people who are doing TBill and Chill would getting less yield for their TBills.
They’d be forced to pull their money out of TBills and look for yields somewhere .
This money may go into asset markets of all kind pushing forth the assets of all kind higher and higher, leading the long duration yields to lower ..
Do I get it right ?
That cannot be done by definition. If some investors moved their money from T-bills into something else, some other investors have to move the exact same amount into T-bills, because T-bills don’t just dissolve into air, and on net, investors cannot move their money away from T-bills into something else. Investor A can sell all their T-bills, but other investors MUST buy them to allow investor A to sell them. Same with letting T-bills mature and not replacing them. Someone has to buy those new T-bills that investor A didn’t buy and therefore move the same amount into T-bills that investor A got out of them by letting them mature.
That’s how it works with securities.
Thanks WR for the reply. Makes sense. There is a myth out there that : Money on the sidelines.
There is no money on the sidelines unless FED creates via QE.
Thanks Wolf, that answers my question from the other thread. The question then is, will the treasury reduce the number of t-bills it issues (knowing less demand at lower rates) and instead issue that money it needs to replace as longer bonds?
The Treasury will take care of the long end. It’s a team game.
Nope.
Great article and even better comments Wolf! I really appreciate it and look forward to all your articles. This point of long term rates being driven by the market is lost on most people. I’m hopeful someone must have whispered in the ears of our government leaders that a good way to steepen the yield curve is to lower short term rates AND increase long term rates.
I’m holding on tight for a wild ride over the next few months.
The Fed acts too late if they want to prevent an economic downturn. The major problem has been out of control government spending, stimulating the economy when it was not needed. Now as the economy is on the brink of turning south, when there would be a more appropriate time to stimulate, they have not enough money left. Instead state and local governments are increasing taxes, which not only takes money out of peoples pockets, but also adds to inflation (services in particular). The gamblers run the stock markets to new all time highs, inflating the asset bubble further. Brilliant.
Thank you pow pow for making my house go up 9,000% in the next year and my stocks go up 5,000% in the next year I’m going to be richer beyond any of you pictures can believe!
It’s funny (to me as an old dude) that no one here, even Wolf, who does frequently remind us, that even at the current Fed rate, we’re way below the avg rates between Mar ’68 to Aug 2007 which was OVER (often WAY OVER) 5% except for the 4+ years after 9/11 and the dot-com bust.
It seems this is just another example of people who got and now feel entitled to ZIRP or as close as possible. ,
Yes. The common thought now is that ZIRP should be the default unless inflation requires it to be higher. My feeling is, even with 0% inflation, rates should be higher to prevent misallocation of capital.
Wolfman,
Thoughts about Bessent and and Treasury using tax payer money to buy the 10 year to control the long end of the yields? I have heard the contrarian view that it will end in disaster since many holders will be selling off their treasuries to the US Treasury itself.
This is the funniest-silliest most nonsensical way I have every heard anyone twist it.
Read this very carefully. This from last October, when Yellen was doing the buybacks (yes, it’s a Biden/Yellen program that Trump/Bessent continued). It goes into the principle and the numbers – you’ll be surprise so read it carefully:
https://wolfstreet.com/2024/10/25/treasury-buybacks-october-update-on-the-bond-market-bloodletting/
Wolf,
I read your link, but I believe Bessent’s comment was referring to how Japan had implemented Yield Curve Control through direct buying of Japanese bonds, and that the same could be done in the US.
I was hoping you could comment on that.
That’s just nonsense. He didn’t say what you said he said, and he can’t do that. That’s just twisted stupid BS.
And you didn’t read my article or else you wouldn’t spread this stupid BS here.
The US Treasury, of which Bessent is in charge, cannot print money and cannot do QE and cannot do YCC. To say otherwise is just braindead manipulative bullshit.
The Bank of Japan (central bank) WAS doing QE, same as the FED (central bank) doing QE. The only difference was that the BOJ’s QE had set a specific target range for the 10-year yield (above 0% but below something like 0.25%), and the Fed’s QE brought down long-term yields without a specific target, and the 10-year yield dropped as low as 0.5%.
So that was QE by the BANK OF JAPAN and by the FED, with newly created money (money printing) to buy bonds.
But as inflation began to surge in Japan, the BOJ stopped doing QE, no more YCC. The BOJ is now doing QT, same as the Fed.
Abusing my site to spread this garbage will lead to your comments getting shredded. Go somewhere else spread that shit. I’m done wasting my time on it.
Because the BOJ has unlimited transaction deposit insurance and low rates, there is a large volume of “saved” demand deposits slowing the velocity of circulation.
“One possibility is that workers, who see their real incomes decline because of higher prices, demand and get higher wages from employers, setting off adverse wage–price dynamics. Given that the labor market is not particularly tight and faces increasing downside risks, that outcome does not seem likely.”
That doesn’t seem very fair. The non-asset holders that are suffering the FED has calculated they don’t have a leg to stand on in terms of demanding higher wages. They just suffer as the FED “looks through” Tariff inflation as transitory.
I hope the bond market wakes up.
JamesN, we may be back to bogus “transitory inflation” again, this time the Fed will blame it on “one-time” tariff effects. The Fed is worried about the jobs numbers, which look really bad from BLS, the Bureau of Lousy Statistics. Last time they cut 50 bp, it was based on job numbers that turned out to be wrong. I’ve heard all this before. Will the Fed make the same mistakes again? Of course. I expect the Fed to cut one at its next meeting. I would be surprised if they did not.
Like a one time jump in prices is okay …. will they call it “transitory”?
I’m surprised that the threat of firing Fed Governor Lisa Cook hasn’t caused a spike in yields as they did when Powell was also threatened to be fired. They both have 1 vote and curious that it doesn’t cause concerns again that The Fed isn’t truly independent. But I guess let the good times roll…..
The economy may be slowing but the unemployment level is at historical lows. If Powell caves in now, he will interrupt the deflation in housing next year.
This is my concern as well. Perhaps mortgage rates remain constant or even increase because the bond market would regard a cut as increasing risk.
It sounds like they’ll cut no matter what the data is, but cutting in the face of rising inflation seems like it could cause chaos in bond market? What happens then?
Also I don’t want unemployment for anyone but would allowing unemployment to go up to 4.5/4.6% all that bad, or are they bound to maintain this historically low rate forever?
The dollar is dropping.
The dollar dropped to a low point in early July and has since then ticked up a little and is roughly back to where it was two months ago (DXY, Trade Weighted Broad Dollar Index)
Outside of causing a recession, how would rate changes have any effect on tariff-related pricing/inflation?
Higher rates would lower demand (especially for things like cars), and they might cause a bigger slowdown in employment, and more unemployment, which would lower demand further, and lower demand would make it harder/impossible for retailers to increase prices without losing sales.
Trump is a sales guy s I’m trying to figure out what the angle is here…
1. He knows America hates inflation. He won an election because of that. He can’t have inflation take off again. That will cost them midterms and be blamed on tariffs. He needs inflation as low as possible.
2. The economy is slowing from 2021 whether its on track to return to normal growth or a recession – hard to say. He wants to fed as a scape goat, to blame for not cutting.
3. Cutting drove up long term rates so doesn’t help any buddies in CRE
I’m not totally sure how a rate cut gives trump what he wants…
The only benefits I can think of from cutting is the interest in the national debt is cheaper and it may keep the economy going at a pace that keeps the general population happier (but if there’s noticeable inflation that won’t be the case)