By Steven K. Beckner
(MaceNews) – After the Federal Reserve’s policymaking Federal Open Market Committee raised short-term interest rates for a fourth straight meeting on July 27, Chairman Jerome Powell said that, henceforth, he and the FOMC intended to forego further “forward guidance” on the probable pace of rate hikes.
Instead, he said, they would go “meeting by meeting” and assess the incoming data before deciding what the appropriate rate setting would be.
But that hasn’t stopped a wide array of Fed officials from continuing to pursue an open mouth monetary policy. This week, they have been busily executing another apparent communications shift, or rhetorical adjustment if you like, seemingly designed to massage markets in the face of market developments they didn’t particularly care for.
Many on Wall Street interpreted Powell’s comments to reporters following July’s 75 basis point rate hike announcement as signaling a less aggressive monetary tightening in the months ahead – a slowing of rate increases and perhaps even a pause and eventual rate cuts. Stocks rallied strongly, and bond yields sank – not exactly the prescription a central bank wanting to cool demand to defeat inflation would write.
Since the FOMC meeting, Fed officials have responded to these untoward market trends by launching what looks like a concerted campaign to correct the misimpressions they apparently believe were created by previous Fed communications. Lest anyone might have gotten the wrong idea, an assortment of voting and non-voting Federal Reserve officials have been reaffirming their determination to beat down inflation, even at the expense of growth and employment.
This new message or meme has not been random. There’s been a clear pattern, just as there had been in previous months. And the purpose seems clear: to modulate or manage markets by sending signals about the Fed’s intent.
The central Fed message has varied quite a bit over the past year. Even though inflation began to accelerate last spring, Powell and his fellow policymakers insisted that above-target inflation was “transitory.” Some even fretted that disinflation might resume and that inflation expectations were too low. They were in full support of the unprecedented “fiscal stimulus” that was helping fuel the inflation.
Then suddenly last October, Powell & Co. woke up to the fact that price pressures were persisting and accelerating. Although they would keep the federal funds rate near zero and continue large scale asset purchases until March of this year, they pivoted to increasingly vociferous expressions of concern about inflation.
Powell & Co. ratcheted up their vows to defeat inflation, and the rhetoric was accompanied by dramatic upward revisions in funds rate projections. The median funds rate projection for the end of 2022 went from 0.9% in the December 2021 Summary of Economic Projections to 1.9% in the March SEP and to 3.4% in the June SEP. The funds rate was projected to go to 3.8% next year.
After belatedly leaving the zero lower bound with a 25 basis point rate hike on March 16, the FOMC’s intentions to raise rates more aggressively at subsequent meetings was well advertised. “Expeditious” tightening came in the form of a 50 basis point rate hike on May 4 and 75 basis point increases on June 15 and July 27.
But between the June and July meetings there was a perceptible shift in Fedspeak. A number of Fed officials began to warn against raising rates too far, too fast. Raising rates too aggressively might disrupt financial markets, with negative financial repercussions that could feed back into the economy and complicate the Fed’s anti-inflationary mission, warned Kansas City Fed President Esther George. And she was not alone in her sentiments.
At his July 27 post-FOMC press conference, to be sure, Powell continued to talk about the need to raise rates “expeditiously’ and move them to a “moderately restrictive” stance to combat inflation. He didn’t rule out another “unusually large rate increase” on Sept. 21 if the inflation data were to prove unfavorable.
But the Fed chief pulled his punches and mixed his messages.
Powell also pronounced that, after 225 basis points of tightening the FOMC had arrived at “neutral,” since the funds rate target range was near the 2.5% “longer run” rate estimated in the June SEP. What’s more, he took note of economic slowing; warned of the risk of doing “too much,” and seemed to suggest that the end of tightening was in sight.
“(N)ow that we’re at neutral, as the process goes on, at some point, it will be appropriate to slow down…” he said. “We’ve been front-end loading these very large rate increases, and now we’re getting closer to where we need to be ….”
It should have been no surprise that many financial market participants had a bullish interpretation of Powell’s comments.
But now, in the last four days, we’ve seen Fed rhetoric swing back in the other direction. No more talk of overdoing the tightening. Instead, it’s all about renewing the commitment to fighting inflation at all costs.
Most recently, Cleveland Fed President Loretta Mester, an FOMC voter, said she wants to see “several months of inflation coming down” before she’ll believe there is “compelling evidence” that inflation is headed toward the 2% target – Powell’s standard for halting rate hikes.
She had previously said the Fed had “more to do” to reduce inflation.
Mester’s fellow voter James Bullard made similarly hawkish remarks, saying, “We are going to be tough and get that (a return to 2% inflation) to happen.”
“I think we can take robust action and get back to 2%,” he declared, adding that rates will likely need to stay “higher for longer” to get evidence that inflation is “coming down convincingly.” He favors pushing the funds rate from the current 2.25% to 2.50% up to a 3.75% to 4.00% range by the end of this year.
Among non-voters, Richmond Fed President Thomas Barkin also reaffirmed the Fed’s determination to beat down inflation and said the FOMC will “do what it takes,” even if it means recession.
Chicago Fed President Charles Evans, formerly thought to be one of the Fed’s leading “doves,” said Tuesday that a 50 basis point rate hike in September might be a “reasonable assessment’ “if you really thought things weren’t improving,” but said “75 could also be okay.”
Minneapolis Fed President Neel Kashkari joined the chorus by pushing back against speculation that the FOMC will be cutting rates next year. He said that “seems like that’s a very unlikely scenario right now given what I know about the underlying inflation dynamics. The more likely scenario is we would continue raising (interest rates) and then we would sit there until we have a lot of confidence that inflation is well on its way back down to 2%.”
San Francisco Fed President Mary Daly, who also used to be thought of as on the dovish end of the spectrum, said the Fed is “nowhere near” done fighting inflation. She said a 50 basis hike at the September meeting seems like “a reasonable thing to do,” but added, “if we just see inflation roaring ahead undauntedly, the labor market showing no signs of slowing, then we’ll be in a different position where a 75-basis-point increase might be more appropriate …..”
In contrast to Powell’s remark that the funds rate is now near “neutral,” Daly said, “Not in my judgment …..
“When you think of 2.5%, that’s the longer-run neutral rate of interest, but right now, inflation is high, and there’s a lot of demand chasing limited supply, and so of course the neutral rate is elevated,” Daly said. “So, my own estimate of where that would be right now is around or a little bit over 3%, maybe 3.1%. “So, in my judgment, we’re not even up to neutral right now.”
This ongoing pattern of hawkish comments contrasts sharply to the kind of things officials had been saying before this week and seem aimed at manipulating market psychology, which had grown hopeful of less aggressive Fed tightening fueled by Powell on July 27 and earlier by other policymakers.
Much as the Fed has pledged transparency and proclaimed its desire to be predictably in synch with financial markets under its revised August 2020 strategic framework, Powell has run a highly discretionary monetary policy regime, under which Fed speakers tailor their line to shifting market perceptions.