FOMC Statement and Press Conference: No Big Surprises and A Singularly Anti-Inflation Approach Articulated

January 26, 2022

As expected, the FOMC statement signals that the fed funds rate will likely be raised “soon,” code for the clear  possibility of lift-off at the next meeting in March. Inflation has been recategorized from “having exceeded 2%” to “well above 2%.” An assertion of “a strong labor market” was inserted into the statement as a further justification for hiking rates soon. Other comments on the U.S. economy were as before. The pace of tapering bond purchases was left unchanged, and such will be done by March.

Chairman Powell’s Press Conference: The communication of U.S. monetary policy throughout the pandemic and well before had stressed a dual commitment to securing goals of price stability and maximum employment.  Both had to be met before interest rates would be raised, and presumably the subsequent normalization of rates would continue to be steered with an eye on how each mandated area of policy control was evolving. My biggest takeaway from Chairman Powell’s comments are that at least during 2022, if not beyond, the maximum employment objective will be set to the side for all intents and purposes, and there instead will be singularly focused effort to achieve very discernible progress on bringing down actual inflation and lowering indicators of expected near-term inflation.  The tip-off regarding this break from the past was the deletion of a first paragraph in the statement at 19:00 GMT that had been featured after every FOMC statement since March 2020, reading

The Federal Reserve is committed to use its full range of tools to support the U.S. economy in this challenging time and thereby promote its maximum employment and price stability goals.

In Powell’s opening press comment remarks and subsequent Q&A, it became more clear that this deletion was not just an acknowledgment of shifting priorities from maximum employment to inflation reduction. The jobs mandate is simply so overwhelmingly met at the moment and expected to remain so for the foreseeable future that officials will be able this year to focus on a single mandate, that being the restoration of price stability. Powell called the labor market significantly tight now and very likely to remain so by a wide spectrum of measure, considering that growth is on a course to exceed trend again this year. Even though the unemployment rate has almost returned all the way to its pre-pandemic level much sooner than expected, Powell asserted that the current jobless rate actually understates how tight the labor market has become, and the most serious threat to maintaining a state of maximum employment this year would be the failure to make ample progress toward regaining the price stability objective.

It is the FOMC’s baseline forecast that inflation will recede in the second half of 2022 but not nearly back to the 2% target a year from now. Risks to the baseline scenario lie in both directions, but Powell suggested that upside risks seem more compelling. The hope is that a less accommodative fiscal policy and eventual progress in reducing supply chain impediments will supplement the steady lessening of Fed accommodation as we move through the year. In response to a number of questions that the situation now is different from that faced in 2015 when the previous tightening cycle began. The economy is stronger this time, on course to be growing faster than then, and plagued with inflation well above target rather than below that goal.

Although Covid may throw a curve ball at the economy in 2022 as it has several times before, the U.S. economy is proving more imperious to the pandemic. U.S. growth has been high both on a U.S. historical basis and when compared to other economies during the past year or two. And while inflation is still projected to trend lower, those dynamics haven’t yet begun and are now expected to develop more gradually than anticipated earlier. Moreover, time is not on the side of policymakers. More than any other factor, expected inflation reacts with a lag to actual inflation, so the longer that U.S. inflation exceeds 2% by a substantial margin, the greater is the likelihood of expected medium-term inflation drifting upward as well.

Chairman Powell ducked getting into specifics such as the frequency of rate hikes or whether all changes would be by the 25-basis point upward increment favored in the past. But he did repeat several times that there is a strong understanding by FOMC members that the situation now is different from others this century. In hindsight, the 17 straight 25-basis point hikes between mid-2004 and mid-2006 was too predictable and too gradual. Lessons from earlier tightening cycles when the United States genuinely had an inflation problem suggest to me that there is a high likelihood that at some point it will become to implement a rate hike that is greater than a quarter percentage point in size. Perhaps that need can be avoided but probably only if the faith in other dynamics from the supply side and changes in fiscal thrust kicks in strongly. Powell didn’t seem terribly confident that the baseline inflation path is the one that will develop.

In short, Powell’s remarks were more hawkish than I was expecting, and the market reaction seemed to concur. Between the released statement at 19:00 GMT and the end of the press conference at 20:30 GMT, the Nasdaq, S&P 500, and DJIA fell by 2.8%, 2.0% and 1.6%. The ten-year Treasury yield climbed six basis points to 1.84%, and key commodity prices dropped.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

Tags: ,


Comments are closed.