FOMC Statement and Press Conference
May 4, 2022
By a vote of 10-0, the Federal Open Market Committee increased the target range for the federal funds rate by the expected 50 basis points to 0.75-1.00%. An acknowledgment of negative GDP growth in 1Q 2022 is counter-balanced by assertions that personal consumption and business investment remain strong, an upgraded characterization of employment growth to “robust”, and continuing substantial declines in the jobless rate. The statement also notes that Russia’s invasion of Ukraine brings a new inflationary factor to the table and adds that this impact well extend beyond the near term. The war injects a growth headwind, and so lockdowns in China. But a new addition to the statement’s text — The Committee is highly attentive to inflation risks — leaves no doubt that for now restoring price stability must take priority over maximizing employment in the central bank’s dual mandate.
A separate text released concurrently with the FOMC statement lays out details of a plan for reducing the Fed balance sheet that will be implemented starting June 1, 2022. For June, July, and August, $30 billion of maturing Treasury assets and $17.5 billion of Agency bonds will not be reinvested. In September, those totals will be doubled. Eventually as the size of the balance sheet falls close to what officials consider appropriate, the program will be phased gradually out rather than ended abruptly.
Not a whole lot of information emerged at the press conference, which for the first time in about two years was held in person and with few people wearing protective masks. The magic number for interest rate changes, which on the upside had been 25 basis points for the past two decades, is now 50 basis points. The FOMC wants to move expeditiously (a word Powell used repeatedly) to a stance that neither promotes faster economic activity nor one that slows such. To use the analogy of driving a car, the monetary foot has for some time been depressing the gas rather significantly. The next several changes, all hikes of 50 basis points, are tantamount to exerting progressively less pressure on the accelerator but not yet pressing the brakes. From the new federal funds rate range of 0.75-1.0%, it would take about three more increases before the monetary foot is off the gas and ready to step on the brakes. Rate increase beyond then would be like stepping on the brake, and each move would represent depressing the brakes a bit higher.
But of course this process not nearly so precise. The devil is in the details. Monetary policy affects economic activity and price inflation through the demand side, and the intermediate vehicle for that process happens through a change in financial market conditions, which can be observed in a variety of ways. So officials will be moving incrementally and watching financial markets and ultimately the real economy for confirming signs that their actions are producing less accommodative financial market conditions and slowing down aggregate demand. This process works in famously long and variable lags, variable because it interfaces with other shocks to both the supply and demand side that are happening concurrently. Powell repeatedly stressed that the line between a restrictive and expansionary monetary policy cannot be measured with precision, so that officials are not aiming for any particular level but rather moving incrementally until one can see that financial markets are becoming progressively less loose. The FOMC also want to see the labor market become less tight and inflation (particularly but not exclusively at the core level) ultimately crest and show signs of conforming to the desired path that will return to the 2% target.
Powell also characterized the current heavy emphasis of inflation reduction over the other mandate of maximizing employment as not a choice between two objectives, only one of which can be addressed. The Fed’s focus is always medium-term to long-term, because that is where any changes in its stance will be seen. And he correctly states that the labor market is currently very imbalances and that it’s long term health needs a return to price stability.
The less defensible aspect of the Fed’s plan is that it is seemingly confined to moving in only 50 basis point increments. There are five remaining meetings in 2022. A 1.0% fed funds target ceiling is already woefully behind the curve when set against inflation of 6.6% on the PCE deflator and 8.5% on the CPI. Changing policy in 25-basis point steps is off the table and appropriately so. But in answer to one question, Powell also revealed that lifting the rate by more than 50 basis points also is not under active consideration. Why not? One could attain a 2.5% rate level by the September 21st meeting with back to back increases of 75 bps. It will take an extra six weeks and into November to get a semblance of neutrality, where the monetary stance is no long augmenting growth. If one wants to be truly expeditious, why wait until so late in the year to completely wring out the accommodative nature of monetary policy from the economy? Although Powell repeatedly argued that although the task of restoring price stability while avoiding a recession would be challenging, he thinks it’s still quite possible. Ruling out increases of 75 basis points, which many other central banks around the world have done, suggests that officials do worry about stumbling into a recession.
More than once, there were references to former Fed Chairman Volcker and the courage under his stewardship of a Fed willing to do whatever it took to end runaway inflation at the time. A sub-text of that experience is that for 15 years previously, the Fed had attempted reductions of successive waves of inflation only to suspend the effort each time prematurely. When inflation gets as high as now, experience suggests that it becomes very, very hard to restore sustainable price stability without incurring a recession. If the current experience proves to be an exception, monetary policymakers are going need relief from a number of inflationary factors on the supply side that are beyond their control.
Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
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