Comment on FOMC Statement and Powell’s Press Conference
November 2, 2022
The opening two paragraphs describing U.S. growth and inflation, the impact of Russia war on such, and the prioritization of the Fed’s two mandates are unrevised.
Paragraph 3 confirms that the federal funds rate target range is indeed rising 75 basis points to 3.75-4.0% in line with earlier rhetorical guidance. The committee agreed also to continue reducing the Fed’s balance sheet along the lines outlined earlier, and reiterates the strong commitment of returning inflation to 2%. The paragraph also includes the following insert:
Ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.
Paragraph 4 reads the same as in earlier FOMC statements, outlining an approach that is not decided by the passage of time but rather dependent on a wide array of timely information, “including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”
The final paragraph tells the voting pattern, which was unanimous (11-0) and included the same personnel that voted at the September meeting.
Investors saw an inflection point in the formal statement. In the half hour that followed and before Chairman Powell’s press conference began, equities rallied but the dollar and long-term interest rates slipped. The opening statement and ensuing Q&A session of the press conference dispelled that clarity, and markets more than reversed those initial reactions. The reality is that the Fed is dealing with a very complex and new situation because the structure of the U.S. and world economy have been drastically transformed many times over since the 1970s. In response to the questions, Powell’s answers painted a process that’s constantly adapting and one in which one can’t say what the appropriate response to a specific future development might be, for example the 3.5% jobless rate rising to 4.0% or even 5.0% without also knowing what everything else is doing.
Some basic truths that did emerge are
- Officials are trying to answer three questions — how fast to lift rates, how high will its rate ultimately need to climb, and how long after that peak is attained must officials wait before attempting to lower rates. The first question was initially paramount, but the second is now getting more attention.
- It is Powell’s opinion, and very likely his sense of the FOMC majority, that the peak rate level will need to be higher than officials were assuming as recently as their previous meeting in September.
- The federal funds rate is starting to enter a restrictive stage, but the string of rate increases will not even be paused, that is not raised at a scheduled meeting, until the Committee is confident that policy has become tight enough to reduce inflation to its 2% target eventually.
- A very tight labor market is a large impediment to the Fed’s mission. A lot of other disinflationary developments could probably arise, but the cycle would continue in the absence of definitive signs from a wide range of labor market indicators pointing to emerging slack.
- Officials want positive real interest rates, that is nominal rates adjusted for expected inflation, but they are looking at interest rates across the whole maturity spectrum, not just their federal funds target.
- The Fed empathizes that its rate tightening is causing big problems for other economies, but officials believe that restored U.S. price stability is in the best long-term interest of all economies, and that delaying or watering down what this goal now requires will exert a mounting cost on everybody.
- Officials would have felt remiss if they had hiked only 50 basis points today or had projected today that they will scale back to a 50-basis point increase in December. The data simply do not yet support going only 50 bps this month, or even doing such next month assuming projected inflation doesn’t climb over coming weeks. It’s not a matter of being more hopeful that policy is restrictive enough and just waiting an extra 6-7 weeks to make sure that belief is justified. On many fronts, the data will have to become more encouraging for the rate hike’s size in December to be scaled back.
- The conditions for trimming the hike’s size at the first meeting in 2023 are not quite the same, because by then the cumulative tightening of policy since March 2022 will be great enough and have happened over a long enough period to be a pertinent additional guide to making the most appropriate decision..
Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: FOMC
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