Yves here. I have refrained from speculating about what the Fed will do since there is a whole industry of Fedwatchers, some of whom are even paid real money for their prognostications. But it is noteworthy that many readings have been influenced or afflicted, depending on your point of view, by market touts not wanting negative views, since that could put the Confidence Fairy in a swoon. So the focus of discussion has been when the Fed will cut, which presupposed that the next move by the central bank would be to lower rates.
By contrast, our great unwashed commentariat has been up in arms about major price increases in all sort of nooks and crannies like home and car insurance. It seems as if on the ground readings on the trajectory of inflation, at least this year, provided a better reading than the punditocracy, which overall has ideological and professional reasons to want the Fed to cut, which biased their readings of the state of play.
The fact is that the Administration is running a hot fiscal policy, which cynically looks like an effort to secure a Biden re-election, relying on the Fed to tamp down on inflation. This very unorthodox combo is proving to be messy. And it’s not as if the Administration could quickly tamp down on spending even if it wanted to.
By Wolf Richter, editor at Wolf Street. Originally published at Wolf Street
“Hike” and “rate hike” were mentioned 8 times by reporters and by Powell during the FOMC’s post-meeting press conference today. Those terms weren’t mentioned at all in the press conferences during Rate-Cut Mania, which were all about “rate cuts,” how many and when.
Powell was obviously unenthusiastic about rate hikes, and thought it “unlikely that the next policy rate move will be a hike” – “our policy focus is really how long to keep policy restrictive,” he said. But rate hikes weren’t even on the table before, so that alone was a big shift, from a bunch of rate cuts to having to deal with the possibility of a rate hike. One step at a time.
What Would It Take for the Fed to Hike Rates?
“We need to see persuasive evidence that our policy stance is not sufficiently restrictive to bring inflation down to 2%,” he said. “We look at the totality of the data to answer that question. That would include inflation. Inflation expectations and all the other data, too.”
The Fed could hike rates “if we were to come to that conclusion that policy wasn’t tight enough to achieve that, so it would be the totality of all the things we’re looking at; it could be [inflation] expectations, it could be a combination of things. If we reach that conclusion – and we don’t see evidence supporting that conclusion – that’s what it would take for us to take that step,” he said.
“So, if we were to conclude that policy is not sufficiently restrictive to bring inflation sustainably to under 2%, then that would be what it would take for us to want to increase rates,” he said.
Is there a timeframe of persistent inflation that would trigger a rate hike? “These are going to be judgment calls. Clearly restrictive monetary policy needs more time to do its job. That’s pretty clear based on what we’re seeing. How long that will take and how patient we should be depends on the totality of the data and how the outlook evolves,” he said.
Was there a discussion at the meeting about a rate hike? “The policy focus has been on what to do about holding the current level of restriction. That’s where the policy discussion was in the meeting,” he said.
Oh Deary, Where Did My Rate Cuts Go?
“So, let me address cuts,” Powell said. “Obviously, our decisions we make on our policy rate will depend on the incoming data, how the outlook is evolving, and the balance of risks, as always. We’ll look at the totality of the data. We think that policy is well positioned to address different paths that the economy might take.”
“We don’t think it would be appropriate to dial back our restrictive policy stance until we’ve gained greater confidence that inflation is moving down sustainably to 2%,” he said.
“If we had a path where inflation proves more persistent than expected, and where the labor market remains strong, but inflation is moving sideways, we’re not gaining greater confidence. That would be a case in which it could be appropriate to hold off on rate cuts.”
“There are other paths that the economy could take which would cause us to want to consider rate cuts.” One path “would be that we do gain greater confidence if inflation is moving sustainably down to 2%,” he said. “Another path could be an unexpected weakening in the labor market, for example.”
“For us to begin to reduce policy restriction, we want to be confident that inflation is moving sustainably down to 2%. For sure, one of the things we would be looking at is the performance of inflation. We would be looking at inflation expectations. We would be looking at the whole story. Clearly, incoming inflation data would be at the very heart of that decision.”
Wait-and-See Is Now Entrenched?
“My colleagues and I today have said that we didn’t see progress [on inflation] in the first quarter. And I’ve said that it appears then that it’s going to take longer for us to reach that point of confidence. I don’t know how long it will take. I can just say that when we get that confidence, then rate cuts will be in scope. And I don’t know exactly when that will be,” he said.
“What do we now see in the first quarter? Strong economic activity. We see a strong labor market. We see inflation. We see three [bad] inflation readings. I think you’re at a point there where you should take some signal. We don’t like to react to one or two months of data. But this is a full quarter. We are taking signal. And the signal we’re taking is it’s likely to take longer for us to gain confidence that we’re on a sustainable path to 2% inflation. That’s the signal we’re taking,” he said.
“My expectation is that we will, over the course of this year, see inflation move back down. That’s my forecast. But my confidence in that is lower than it was because of the data we’ve seen,” he said.
“We actually have the luxury of having strong growth and a strong labor market, very low unemployment, high job creation, and all of that. And we can be patient. We will be careful and cautious, as we approach the decision to cut rates,” he said.
What’s the Chance of No Rate Cuts?
“I don’t have a probability estimate for you. But all I can say is that we didn’t think it would be appropriate to cut until we were more confident that inflation was moving sustainably at 2%. Our confidence in that didn’t increase in the first quarter. And, in fact, what really happened was we came to the view that it will take longer to get that confidence.”
“But there are paths to not cutting. And there are paths to cutting. It’s really going to depend on the data.
QT Slowdown to Avoid Accidents That Could Stop It Prematurely
“The decision to slow the pace of runoff does not mean that our balance sheet will ultimately shrink by less than it would otherwise, but rather allows us to approach its ultimate level more gradually,” Powell said.
“In particular, slowing the pace of runoff will help ensure a smooth transition, reducing the possibility that money markets experience stress, and thereby facilitating the ongoing decline in our securities holdings that are consistent with reaching the appropriate level of ample reserves,” he said. The Fed has already shed over $1.5 trillion in assets since it started QT in July 2022.
Why even slow QT? “It’s really to ensure that the process of shrinking the balance sheet down to where we want to get it is a smooth one and doesn’t wind up with financial market turmoil, the way it did the last time we did this,” Powell said in reference to the repo market blowout in the second half of 2019, which caused the Fed to step back in with large-scale repo operations that quickly undid a big part of QT-1. And that’s to be avoided this time.
The FOMC’s statement and Implementation Notes today already outlined the basics of the QT slowdown:
- Starts in June
- Cap for Treasury runoff reduced to $25 billion from $60 billion
- Cap for MBS runoff stayed at $35 billion
- If MBS run off faster than $35 billion a month, then the excess will be replaced with Treasury securities, and not MBS.
Getting rid of MBS entirely. What Powell added in the press conference was the Fed’s intention “to hold primarily Treasury securities in the longer run,” meaning they want to get rid of MBS entirely. Powell cited this intention as the reason for not reducing the runoff rate of MBS, and for not replacing any excess MBS runoff over the $35 billion cap with MBS, but with Treasury securities.
This unchanged cap also means that QT will speed up when the housing market unfreezes and sales volume goes back to more normal levels, which would trigger a much faster rate of mortgage payoffs, which would trigger a much faster pace of passthrough principal payments to holders of MBS, such as the Fed. And passthrough principal payments being the primary way in which MBS come off the balance sheet, it would speed up QT, and could push QT to a maximum pace of $60 billion a month.
Interest rates are still way too low. Official inflation is at TWICE the target rate. Inflation expectations are entrenched now (ask anybody if they expect prices to rise further in the coming years). There are ongoing bubbles in housing, stocks, crypto (even meme coins!). And the labour market is very tight and wages are rising very fast. This is the definition of an overheated economy, and central banks are still behind the curve.
For who?
Since Jackson Hole 2022, all of the Fed meetings have been variations on “the pain” speech. I’ve thought the rate cut talk after the meetings has to border on criminal.
The same people cheering loudest for return to easy money are often the same ones saying things are great and “pain” is in people’s imaginations. SO….rate cuts are allegedly a tool to fight recessions, but this is “the best economy ever” and six rate cuts are coming before the end of the year. (that was being said around the beginning of the year). All of this on top of the sad fact that the current rates are not historically high and every whine about measely .25 hikes showed how decades of QE had turned investors into degenerates.
You know what’s worse than the narrative economic circus around interest rates in the USA? It’s that the USA has exported this manipulation of speculation game to the rest of the world.
Latest example: Japan. Those easy money superstars are now ridiculously playing “guess what the Central Bank will do with rates.” So many countries seem to be doing this instead of being able to get on with economic adjustments or changes that are needed by their populations.
So this is a joke of a global “economic order” that can not have transparency in monetary policy because of fealty to speculators who just want volatility for their trading environment.
Hate to say it but I miss Greenspan. He knew how to keep his mouth shut or at least utter inscrutable sentences that left rate cut cheerleaders and pivot-mongers befuddled.
Powell’s verbal puke-fests show his lawyer training and it isn’t helping him in this job role.
No matter how carefully the Fed may think they are wording statements, those words always appear to get twisted by pundits, economists, analysts. That’s a big part of it. Somebody pulled a “July rate cut” out of the mouth of Powell…somehow!!
I have to admit, I suspect some it is also garden variety bond bagholders and their mouthpieces that were still trying to dump long dated bonds. I don’t think all bond holders had or have the exact same access or sufficient access to the various Fed facilities.
I agree. What in geopolitics is called “strategic ambiguity” is what Greenspan did with monetary policy. You never knew for sure what was coming.
This changed completely in the Bernanke era, when “forward guidance” became the policy tool, and it went from bad to worse. In the end, they committed to ultra low rates even YEARS into the future! This is one of the reasons for the current catastrophe, because when the inflation wheels started to come off, they were reluctant to change course because of this commitment and the loss of face when they walked back on it. (Remember “Transitory”?)
The ECB is even worse: they were still doing QE until the summer of 2022, when inflation was already in double digits! (And remember that unlike the Fed, the ECB’s only mandate is fighting inflation).
They really screwed up. Now it will take many years (perhaps even a generation) to re-anchor people’s inflation expectations.
People should stop caring about inflation and start caring about pay rises. Inflation is the rentier’s enemy and the enemy of my enemy is my friend. Demand pay rises and see the profit share of the economy shrink and the labour share rise.
There are many potential good economic arguments why I am wrong but they all assume the priors of capital and the rentier class. What’s good for Wall Street is not good for Main Street: sustained inflation and pay rises may be the mean reversion for forty years of globalisation and offshoring-led deflation and pay suppression.
Re-examine your priors, people!
You are overlooking a few things, imo.
The reason the middle class and below are worse off than in 1980 is not because they didn’t get pay rises but because the pay rises didn’t keep up with inflation. Workers need to fight for every pay rise (going on strike etc), which is always difficult. Therefore, they would be better served with ZERO inflation, because then they don’t have to keep fighting just to preserve their purchasing power.
Also, recent inflation has proven to be beneficial for Wall Street and not Main Street. Unlike in the past where inflation typically lowered corporate profit margins, this isn’t the case anymore. Corporate profit margins have increased. This is because nowadays everything is monopolies and cartels, so companies get away with insane price rises because there isn’t any competition left.
Inflation also reduces debt burden, which means a transfer of wealth from the poor to the rich (and to large corporations). The rich have more debt (used to finance assets) and pay lower interest rates on it. If I start a small company and need a loan, I pay a high interest rate on that because I depend on a bank (that needs to make profit and pay CEO bonuses etc). But a large corporation who competes with me can simply issue their own bonds and have the central bank buy them up above par (effectively paying a negative interest rate. This is what happened in the eurozone. Now when interest rates rise due to inflation, this levels the playing field, because relatively speaking the rates go up more for the rich corporation than for the small shop owner.
Hear hear
Who is the fed listening to?
‘Rate cuts’ talk is like talk about Russia in Ukraine: Russia has to use shovels, ran out of ammo and stripped chips from washing machines, but it is so frightening, going to overrun the EU next year!
US needs rate cuts (run the fiat presses) or else the treasury will soak up all the cash in the economy.
Talk of easing the taper (quantitative tightening) and continuing to pay 5.3% over night for half a trillion in reverse repos!
Yes this economy is like Russia so great we need to save it with rate cuts!
Anything to keeo the piper from demanding his pay before Nov 2024!
The Fed is independent of politics!
Like those shovels the Russians used to stop Kiev last summer.
Maybe they cut a half trillion a year from the interminable wars against shovel wielders.
How to address flooding the economy with fiat and federal debt!
The politics of it: some want to predict the rate cuts, but don’t want to predict a recession during an election year.
But also the politics: they need the rates higher to attract buyers for bonds – for the money for re-arming. And inflation is being sticky. But they don’t want to predict more inflation during an election year.
How can they consistently ignore the evidence of higher prices due to firms with market power keeping them higher or colluding with the handful of other players in the market to keep them so?
It seems to me, rates would have to remain brutally high in order to force players like, say, Walmart or Amazon to actually drop prices. and since they can operate at a loss, and the few smaller guys can’t, don’t these policies just further squeeze smaller players actually subject to competition?
It also sucks as I walk around my neighborhood and see the houses people bought 6 months before I was able to, and think about how I’m basically paying ~$500/month more for the same house…
This…. With the cost of food, fuel, cars, and living space (rented, or bought) along with myriad other examples of simple “greedflation” causing prices to be exorbitant and only rising. The fed will need to ratchet up rates ad infinitum to keep things “under control”. If there was any real plan to fight this, other methods must be employed. Rate manipulation does not fix the real drivers. (But, its doing a wonderful job of giving reasons for layoffs, wage decline, and screwing the workers)
yep, gutting the new deal and free trading worked out so so well. its all down hill from here.
$3.29/pound of ground pork at Kroger last week.
It was $2.50/pound last month.
There is nothing wrong with the supply chain (I live in one of the largest Pork producing States in the country) so why did they raise the price 32%?!
Greed.
This inflation is not only in USA.
I live in europe and it is precisely the same.
Having higher interest rates means that businesses that borrower will need to raise prices to offset the expense, which is inflationary. Not so sure that the FEDs only policy prescription is really that useful.
Yes, we must raise costs to fight inflation, otherwise costs would rise.
Today’s featured REIT-wreck of the week is NYMT, a mortgage REIT down 13% today alone, and leaking oil like me on the back nine after too many shots of rum and a bad slice.
https://seekingalpha.com/symbol/NYMT
Capital destruction at work! Certainly the pivot-mongers did screw the old pooch, and its only a matter of time before one of these REIT-wrecks hits the shoals and becomes a permanent fixture in the pantheon of failed stocks, as Wolf Street likes to put it.
Well at least the Fed is admitting inflation is still an issue, unlike the current administration which keeps telling us that this is the best economy evah and we shouldn’t believe our own lying eyes.
Too bad though that the toolbox we use to deal with monetary policy still only contains that one giant hammer.
“…The fact is that the Administration is running a hot fiscal policy, which cynically looks like an effort to secure a Biden re-election, relying on the Fed to tamp down on inflation. This very unorthodox combo is proving to be messy. And it’s not as if the Administration could quickly tamp down on spending even if it wanted to…”
I’m not sure about the relationship between Federal gov deficit spending and inflation. As Michael Hudson has written about for many years, most of the deficit spending ends up in foreign central banks, then recycled into USD denominated assets. And much of this spending ends up in the hands of the MICIMATT , and what with all the stock buy-backs etc. this would contribute to asset price inflation, not CPI. We have seen that the CPI increases were largely caused by market manipulation, market abuse and outright price-gouging. (Monopolies, oligopolies, monopsonies…)
And we know that it is Congress, not POTUS who, with a few exceptions, determine budgets and spending – it is bipartisan
All of the extra billions and billions being given to Ukraine, Israel etc. just adds to the deficits.
In the Soviet Union, candidates for public office would often win with 98% of the vote…
…here in the USA, those in public office of economics often claim that inflation is around 2%
The Bizarro World of the collapse of the USSR & USA never fails to come through with odd comparisons of what went down~
The real goal is to goose the economy as needed to boost Biden. Any Fed action in the coming months can be predicted using that heuristic.
Consequences be damned.
On the other hand, what difference does it really make, who “wins” the so-called election? Like we have meaningful choice in Democracy Inc. The Washington Consensus/Bipartisan Consensus will continue. Elections Inc. are merely a very lucrative PR stunt that generates billions for the MassMediaCartel, advertising and marketing firms, consulting firms, PR, the RNC/DNC etc. It’s simply the Best Democracy Money Can Buy!
I have asked myself the same thing – why does the Establishment call for the fainting couch at the prospect of Trump being elected?
My SWAG is this – because America’s various flunkies may be less likely to blindly follow orders if they came from a gauche buffoon such as Trump. Supposedly, in 2008 someone in the CIA did an analysis of the American presidential election, and they concluded that electing Obama would not only keep America’s european buttbois on-side, but that europeans would actively support America’s wars if Obama were presiding over them.
Europeans hated Dubya and McCain but they swooned over Obama.
They hated Bush Jr. but they obeyed all the same, as sycophant-vassals do. They can squawk all they want…
My take is that the “intelligence community” LOVE the DT. He is great for emotional distraction, and to divide the public. The oligarchy always divides, distracts and manipulates public opinion through the mass media. The mass media have featured the DT almost daily for YEARS, they love him too. He has arguably received the most free publicity of any public figure in recent memory. All of this contrived, orchestrated drama also helps to maintain the illusion of choice and so-called democracy. No matter, in the US, there is no way to vote against the interests of the oligarchy, but they have to keep the plebs distracted, tilting at windmills and fighting among themselves.
https://fortune.com/2016/03/01/les-moonves-cbs-trump/
Just an example: today’s US edition of the Guardian features DT, as it does daily https://www.theguardian.com/us
If the IC loved Trump so much, they wouldn’t be using any pretext to be rid of him.
If they wanted him gone, they would have got rid of him long ago. The drama continues…
Powell can’t cut rates, but he can “virtually” cut and help out slow-Joe by jawboning dovish.
He’s a kept man, especially now that Trump has vowed to defenestrate him.
The amount of money conjured out of thin air by QE would have caused hyperinflation in the past, were it not hidden away from public view in the ether, and on display in physical currency.
“the Administration is running a hot fiscal policy, which cynically looks like an effort to secure a Biden re-election, relying on the Fed to tamp down on inflation.
That was Reagan’s economy as well Huge (for the time) deficits while Volcker stood on the brakes.
Yeah, but Volcker didn’t really just stand on the brakes, he was carrying an additional 200 pounds weight while stepping on them, he went from 11 percent to 20 percent.