—Three 2022 Rate Hikes Now Projected By FOMC Participants
–Powell Hints At Quick Start To Funds Rate Liftoff After Taper Ends
By Steven K. Beckner
(MaceNews) – Federal Reserve policymakers moved dramatically, though not unexpectedly, Wednesday to adopt a more aggressive stance against inflation.
The FOMC said it anticipates “similar reductions” in subsequent months, although it repeated it is “prepared to adjust” if necessary.
The Fed is now on track to conclude bond buying by March, as Powell told reporters, which would set the stage for multiple funds hikes in 2022 and beyond.
Underscoring the FOMC’s anti-inflationary pivot toward a more determined monetary firming was a wholesale rewriting of its policy statement coupled with stark revisions in committee participants’ funds rate and other projections.
All 18 FOMC participants’ now project rate hikes in 2022, with 10 of the 18 seeing three rate hikes next year, and two see four hikes. The median projected funds rate at the end of next year now stands at 0.9%, compared to 0.3% in September and 0.1% in June. By the end of 2022, the funds rate is projected at a median 1.6%% and by the end of 2023 2.1%.
Those rate projections are premised on a worse projected inflation outcome, with participants now projecting PCE inflation to run 2.6% next year – up from 2.2% in September. The Fed governors and presidents also more upbeat about the economy, projecting 4.0% real GDP growth and a further dip in the unemployment rate to 3.5% next year.
Not surprisingly, the policy statement underwent major revisions.
No longer does it talk about inflation being ‘transitory,” a word which Powell used repeatedly in the face of mounting wage-price pressures until just a few weeks ago.
Also gone is previous language about inflation having “run persistently below” target. Now, the FOMC concedes that inflation has “exceeded 2% for some time.” The FOMC also removed language about wanting inflation to run “moderately above 2% for some time.”
What’s more, the FOMC stopped saying it “expects to maintain an accommodat5ive stance of monetary policy” until its employment and inflation goals are achieved.”
Explaining the FOMC’s action in a press conference, he said, “We are phasing out our purchases more rapidly because with elevated inflation pressures and a rapidly strengthening labor market, the economy no longer needs increasing amounts of policy support.”
“In addition, a quicker conclusion of our asset purchases will better position policy to address the full range of plausible economic outcomes….,” he continued, adding that “even after our balance sheet stops expanding, our holdings of securities will continue to foster accommodative financial conditions.”
Powell indicated the Fed is very unlikely to start raising rates before the end of tapering, but strongly suggested the FOMC won’t wait long to lift off after the end of tapering. He said there is no reason for the FOMC to wait to raise rates as long as it did the last time the Fed wound down asset purchases.
Although the Fed’s final round of quantitative easing following the financial crisis ended in October 2014, the FOMC did not start raising the federal funds rate until December 2015, and then only very gradually as it faced global economic and financial uncertainties.
Such a dilatory approach to rate hikes is unlikely to happen this time, according to Powell, who noted that the economy is stronger and inflation higher than in the 2014-15 period.
“I don’t foresee there would be that kind of extended wait,” he said, adding that given the strength of the economy now the FOMC “wouldn’t need that kind of long delay.”
Asked whether the FOMC might raise the funds rate before it ends tapering in March, Powell replied that, “If we wanted to lift off before we would potentially stop the taper sooner. I don’t expect that to happen.”
The FOMC would not want to “raise rates while still purchasing assets,” he added.
Powell emphasized that the FOMC’s median funds rate projections do not commit the Fed to raising rates three times next year, and he allowed for the possibility that the Fed could raise rates less sharply if the economy cools more than expected.
“If the economy turns out to be quite differeent from” the FOMC’s rosy forecast, “no one will say” the Committee has to go through with projected rate hikes, he said. “If the economy were to slow down significantly that would have the effect of slowing down rate increases.”
The FOMC has previously said liftoff will only come when maximum employment has been achieved. Powell declined to say when he expects maximum employment to be reached or whether or not the FOMC will wait until maximum employment has been achieved, but said the economy is making “rapid progress” toward that goal, and he suggested the Fed could raise rates quickly if the totality of labor market data seem to justify it.
Powell noted the FOMC’s self-proclaimed “balanced approach” gives it “an off ramp that could be taken, … a provision that would in this case, because of high inflation, (allow the FOMC) to move before achieving maximum employment.”
He said the decision about when maximum employment has been achieved will be a “judgment call” based on a wide array of labor market indicators, notably including wages. So far he said he’s not seeing signs of a wage-price spiral, but said the Fed will be closely watching to see if wage gains exceed productivity in a way that would spur price hikes.
“So far wages are not a big part of the inflation story,” he said. “Looking forward … .if supply imbalances get worked out … what that leaves behind is other things that can lead to persistent inflation. We don’t see this yet, but if wages increase persistently above productivity growth that puts upward pressure on firms and they raise prices.”
“Something persistent and material” on the wage-price nexus is “something we’re watching,” he added.
Powell said he’s still hopeful inflation will moderate, but said the FOMC has to make policy “in real time” based on the current elevated inflation risks that it sees. He denied the Fed is “behind the curve.”
He defended the FOMC’s policy course as a “careful, methodical approrach.”
The FOMC “can’t act as though (the forecasted moderation of inflation” is a certainty,” Powell elaborated. “There is a real risk that inflation may be more persistent and may be putting inflation expectations under pressure.”
“The risk of higher inflation becoming entrenched has increased,” he went on. “That’s part of the reason behind our move today. … We’ve put ourselves in a position to deal with that risk.”
As he has so often said in the past, Powell declared “we are prepared to use our tools to make sure higher inflation doesn’t get entrenched.”
Powell denied that his “pivot” toward a more hawkish attitude had anything to do with his renomination.
The FOMC’s action comes in the wake of a series of worrisome reports on inflation that forced Powell to stop characterizing it as “transitory.”
In late November, days after President Biden nominated him for a second term, “retired” that increasingly dubious claim. The consumer price index rose 6.8% year over year in November — the sixth straight month that the CPI had exceeded 5% – far above the FOMC’s “average 2%” target. And there’s more inflation in the pipeline. As the FOMC congregated Tuesday, the Labor Department announced the producer price index for finished goods rose 9.6% from a year earlier last month.
Also troubling to the Fed have been spikes in wages and inflation expectations. In particular, Powell pointed to the 5.7% third quarter increase in the Employment Cost Index.
The timing of his shift to advocating more aggressive monetary tightening so soon after President Biden announced his appointment to a second four-year term as Fed Chairman was purely coincidental, Powell insisted. “That has absolutely nothing to do with it whatsoever.”
The firming of monetary policy comes as fiscal policy remains extremely loose. Unprecedented federal deficit spending has been adding to demand pressures on prices and wages at a time when many goods and willing workers are in short supply.
Faced with an economically damaging reversal of the price stability hard won by predecessors Paul Volcker and Alan Greenspan, Powell has now led the FOMC to abandon its emergency stimulus much earlier than planned.
Contact this reporter: steve@macenews.com.
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