– Powell Welcomes ‘Disinflation’ but Says Fed Has More Work To Do
– Doesn’t See Rate Cuts This Year; Sees at Least ‘A Couple More’ Hikes
– Rates Likely Need to Stay ‘Higher For Longer’ To Get Inflation to 2%
– Not Yet Seeing Disinflation in Core Services Ex-Housing
By Steven K. Beckner
(MaceNews) – The Federal Reserve further decelerated its anti-inflationary monetary tightening Wednesday but renewed its commitment to inflation reduction and opened the door to a higher, more long-lasting level of interest rates if inflation does not make the progress it is hoping for.
While welcoming recent signs of “disinflation,” Chair Jerome Powell told reporters more evidence is needed and said the Fed has “more work to do” – at least “a couple” more rate hikes He didn’t rule out a pause in rate hikes at some point, but virtually ruled out rate cuts this year. On the contrary, he envisioned needing to keep rates “higher for longer.”
After slowing the pace of hikes in the federal funds rate from 75 basis points to 50 basis points at its mid-December meeting, the Fed’s rate-setting Federal Open Market Committee ratcheted down further to a 25 basis point increase in a unanimous vote.
The move, which followed a cumulative 425 basis points of 2022 rate increases that included four straight 75 basis point hikes, took the policy rate to a target range of 4.50% to 4.75%. That is still 50 basis points shy of the peak rate anticipated last month.
At their Dec. 13-14 meeting, FOMC participants revised up their projections for 2023 from 4.6% in the September Summary of Economic Projections to 5.1% in the December SEP. Individual projections ranged from as low as 4.9% to as high as 5.6%, and 17 of the 19 officials projected the funds rate will need to go above 5% to become “sufficiently restrictive.”
Fed officials did not compile new economic forecasts and funds rate projections at this meeting., and Powell did not say whether he and his colleagues still consider 5.1% an appropriate peak rate. But the FOMC statement and Powell’s post-FOMC comments suggested they still aim to push the funds rate at least that high and keep it there for a while.
The statement served notice that the Fed is not finished raising rates, reiterating its expectation that “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% over time.”
Some thought the FOMC would dispense with the phrase “ongoing increases” in favor of something more finite. The FOMC did alter succeeding language about potential further rate hikes, saying, “In determining the extent 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.”
By contrast, in the December statement, the FOMC referred to “the pace of future increases in the target range,” rather than “the extent of future increases.” This seems to reflect the emphasis Powell and others began to put on the level of rates rather than the pace of rate hikes, as rates went higher.
In another change, the FOMC statement acknowledged that “inflation has eased somewhat,” but quickly added that inflation “remains elevated.”
Powell reinforced the message that further tightening is needed to rein in inflation in his post-FOMC press conference.
“We think we covered a lot of ground and financial conditions have certainly tightened,” he said, but added, “we still think there is work to do there.”
Powell declined, when asked, to say whether FOMC participants will retain December’s upwardly revised rate projections, raise them further or lower them at the FOMC’s March 21-22 meeting.
“We will be looking at the incoming data …..,” he said. “It could be higher than where we are (writing) down right now. If we come to the need to move rates up beyond what we said in December, we would certainly do that. At the same time the data comes in the other direction, we will make data-dependent decisions…”
Powell said the FOMC has “no incentive or desire to “over-tighten,” but seemed to put more weight on “the risk of doing too little, and finding out in six or 12 months that we actually were close but didn’t get the job done, inflation springs back and we have to go back in and now you really do worry about expectations getting unanchored and that kind of thing. This is a very difficult risk to manage.”
He said that, “if we feel we have gone too far, we could certainly — inflation is coming down faster than we expect — we have tools that would work on that.”
However, Powell added, that “we still have the highest inflation in 40 years,” and so “the job is not fully done.”
Although goods inflation has fallen, “we have a sector that represents 56% of the core inflation index where we don’t see disinflation yet. We don’t see it, it is not happening yet,” he emphasized in a reference to core service prices excluding housing.
So, Powell said the Fed is committed to restricting demand to reduce inflation “until the job is done.”
“We’ve raised rates 4.5% points and we are talking about a couple more rate hikes to get to the level we think is appropriately restrictive,” he said. “Why do we think that is appropriately necessary? Because inflation is running hot. We are taking into account long and variable lags. We are thinking about that.”
Although some analysts are predicting the FOMC will cut rates before the end of this year, Powell actively sought to discourage such thinking. “Given our outlook I don’t see us cutting rates this year,” although he added that “if inflation comes down more quickly that will play into our policy setting of course.”
Powell was also asked several times whether the FOMC might pause hiking rates, then resume raising them. He didn’t rule out that possibility but said nothing to encourage such expectations.
“We spent a lot of time talking about the path ahead. And, the state of the economy,” he replied to one question about a pause. “I would not want to start to describe all the details there, but the sense of the discussion was really talking quite a bit about the path forward.”
At another point, Powell said “the Committee, obviously, did not see this as a time to pause. We judged the appropriate thing to do at this meeting was to raise the federal funds rate by 25 basis points and we continue to anticipate that ongoing increases in the target range will be appropriate in order to obtain that stance of sufficiently restrictive monetary policy down to 2%, so that is the judgment we made.”
“We will write down new forecasts in March, and we will certainly be looking at the income and data as everyone else will.”
When it was noted that fed fund futures pricing currently implies one more Fed rate hike, then a pause, Powell responded that he is “not particularly concerned about” that, attributing it to more optimistic market expectations that inflation will decline faster than the Fed.
As he and other Fed officials have done before, Powell said “it is important that overall financial conditions continue to reflect the policy and strength we are putting in place to bring inflation down to 2%.”
Financial conditions are “something we monitor carefully …,” he went on. “It is important that the markets do reflect the tightening that we are putting in place ….”
“There is a difference in perspective by some market measures on how fast inflation will come down,” he continued. “We will have to see. I mean, I am not going to try to persuade people I have a different forecast, but our forecast is that it will take some time and patience, and we will need to keep rates higher for longer, but we will see.”
Powell continued to speak optimistically of a “soft landing,” without using that terminology. He said inflation reduction will likely require a period of “below trend growth” and labor market “softening,” but said “I still think and continue to think there is a path to getting inflation back down to 2% without a really significant economic decline, or significant increase in unemployment.”
Powell said he expects “subdued” growth this year, but not a “substantial downturn.”
The decision came after a series of reports showing a moderation of inflation and a slowing of economic activity. As the FOMC began its second day of meetings, the Institute for Supply Management reported its manufacturing index fell a third consecutive month by a full point to 47.4, sinking deeper into negative territory. This followed previous reports of declining consumer spending.
Though labor markets remain tight, with unemployment just 3.5% in December, layoff notices have proliferated, and ADP said U.S. private payrolls grew a much less than expected 106,000 in January, though bad weather apparently skewed the number lower.
Meanwhile, on the inflation front, the price index for personal consumption expenditures (PCE), the Fed’s preferred inflation gauge, slowed from 5.5% to 5% year-over year in December. Wage gains have also cooled. The Employment Cost Index rose 1.0% in the fourth quarter, down from 1.0% in the third quarter.
Some have urged the FOMC to reconsider the new policy framework it adopted in August 2020, which allowed for inflation overshooting to compensate for previous shortfalls from target and put more emphasis on achieving “maximum, inclusive employment.” But in its annual review, the FOMC decided to keep verbatim its “Statement on Longer-Run Goals and Monetary Policy Strategy.”