–FOMC Keeps Rates Unchanged; ‘Dot Plot’ Sees No Rate Changes for 2 Years
By Denny Gulino
WASHINGTON (MaceNews) – Federal Reserve Chairman Jerome Powell Wednesday said he would have to see wage growth take off, accelerating much faster than the current pace that is throttled slower by low productivity and other factors.
What will it take to raise rates if the labor market turns “hot?” Powell replied, “Really wages.”
He continued, “The labor market is strong. I don’t know that it’s tight because you’re not seeing wage increases. Ultimately if its tight it should be reflected in higher wage increases. It does come down to that.”
He underlined his own view of the labor market, that “to call it ‘hot’ you’d want to see heat – higher wages.”
In his post policy meeting news conference, Powell also defended past rate hikes that preceded the latest rate cuts. “Facts on the ground” have changed, inflation is not threatening and labor slack may be greater than previously thought.
At no point, he said, were the rate hikes under his watch “restrictive.” The Fed “never got the policy even at the level of what we thought the neutral rate was at the time,” he said. Slowing the rate of accommodation “still seems to me to be the right thing in hindsight.”
Powell dismissed the “out-year” expectations reflected in the updated quarterly “dog plot” of FOMC participant outlooks such as seeing no rate changes for the next two years.
“None of us has much of a sense of what the economy will be like in 2021,” he said. He added that in unpublished notes, “A number of people did write down overshoots of inflation under appropriate policy.”
Otherwise Powell’s answers to reporters’ questions were much like the day’s Federal Open Market Committee policy statement. It was as expected, containing no signal as to when the Fed might consider raising or lowering rates again.
The FOMC, in keeping the fed funds rate unchanged, removed its previous reference to “uncertainty” but kept the phrase that it is monitoring a wide range of economic data, “including global developments and muted inflation pressures.”
Powell said the agreement among the White House, Democratic leadership in the House, labor leaders, Mexico and Canada to the newly negotiated USMCA, set to be ratified in the U.S. early next year, does reduce the general level of uncertainty cited in past FOMC statement this year but not as much as would an agreement with China on trade. It’s the state of the China talks that have most often moved markets, he said.
He repeated several times that he is “happy” with the current wait-and-see policy stance, that “policy is not on a preset course and that until there’s a need for a “material reassessment” the FOMC will be content to do nothing.
“The need for rate increases is less,” with inflation remaining below target, he said. “Unemployment can remain at quite low levels for an extended period of time.” There is still a relationship between employment and inflation “but it’s relatively weak.” Understanding the relationship involves more “humility” than confidence.
Central banks around the world, not just the Fed, have found It difficult to reach inflation targets, he said, and the Fed has had more success than most. U.S. core inflation is running at 1.6%, when it was near 2% last year.
“It’s a challenge,” he said and reaching the target takes more than words and intentions. Policy must back up the words, he said.
The “framework” review underway, to reassess the tools and policies necessary to reach the target and the target itself may take until the middle of next year, he said. He suggested the study will not be producing any recommendation as radical as a much higher target, like 4%. “
Anything like a 4% inflation target lacks credibility for a central bank that can’t quite meet a target half that high.
“To move inflation expectations up from where they are, which appears to be a bit below 2%, will not happen overnight,” he said. “It will happen over time as credibility is built.”
As to the Fed’s last four rate hikes that were followed by three rate cuts, they were appropriate for an economy then growing at 3% with generally low interest rates and an unemployment rate in the threes. Now, he said, it’s different.
He answered several questions about the temporary repo facility, repeating it has no consequence for monetary policy. At the same time, the Fed is building the base reserve level and thinking about typically volatile yearend fluctuations in the repo rate. At the end of last year the fed funds rate jumped to the neighborhood of 6%, settled down, then this year jumped even higher, prompting the special efforts to tamp it down..
He did not rule out an eventual standing repo facility or changes in reserve regulations but expressed renewed confidence that the liquidity tightness is being appropriately addressed. The main problem seems to be, he said, banks are not employing the liquidity that is out there, some hoarding cash. Banks “are all over the place” with differing buffer scenarios.
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This story has been updated with additional quotes.
Contact this reporter: denny@macenews.com
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