– Powell Vows ‘Quickly’ To Get To ‘Restrictive’ Stance; Stay There ‘Til Job Is Done’
– SEP Revises Rate Projections Sharply Higher: Median 4.4% End-22; 4.6% End-23
– Unemployment Projected to Rise to 4.4% Next Year As GDP Growth Slows to 1.2%
By Steven K. Beckner
(MaceNews) – The Federal Reserve took another momentously aggressive monetary tightening step Wednesday to restrain demand for goods and services in an effort to combat persistent price pressures, and the Fed projected further substantial rate hikes in coming months.
Chair Jerome Powell declared that he and his colleagues are determined to move short-term interest rates to a “restrictive stance” “quickly” and keep them there for as long as it takes to reduce inflation to the Fed’s 2% target.
The Fed’s policymaking Federal Open Market Committee raised the federal funds rate by 75 basis points for the third straight meeting, lifting that key money market rate to a target range of 3 to 3.25% (a median of 3.13%).
What’s more, FOMC participants revised their funds rate projections sharply higher in their first quarterly update of their Summary of Economic Projections since June. They now anticipate the median funds rate will rise to 4.4% by the end of this year and another two tenths to 4.6% by the ending of 2023, before receding to 3.9% in 2024 and to 2.9% in 2025. The previous “dot plot” had the funds rate rising to just 3.4% at the end of this year and to 3.8% at the end of next year, before falling to 3.4% in 2024.
The latest move – the fifth since the FOMC ceased holding the funds rate near zero in March — leaves the funds rate more than 50 basis points above the FOMC’s estimated “longer run” or “neutral” rate of 2.5% and puts it into the “moderately restrictive” territory which Powell has said for months he and his colleagues were aiming for.
Cumulatively, the Fed has raised short-term rates 300 basis points in just six months, and the impact has been felt far out the yield curve, as well as in the stock market. The 10-year Treasury note yield, which stood as low as 1.68% in early March, had risen to 3.57% on the eve of the Sept. 21 rate announcement. The two-year yield has risen even more, above 4%, inverting the yield curve – a traditional indicator of looming recession.
Nevertheless, the FOMC signaled it is not finished tightening credit. It gave no hint it is ready to pause or even slow the pace of rate hikes in its policy statement, reiterating that it “anticipates that ongoing increases in the target range will be appropriate.”
Powell reinforced that message in a post-FOMC press conference, making clear the funds rate level will need to become more restrictive yet if the Fed is to fulfill its objective of reducing inflation to 2%.
Doubling down on what he said in late August at the Kansas City Federal Reserve Bank’s Jackson Hole symposium in his post-FOMC press conference, he spoke forcefully about the FOMC’s commitment to moving monetary policy into a restrictive stance and staying there “until the job is done,” even if it means higher unemployment and other economic “pain,” although at this point, FOMC participants are not looking for unemployment to go that high.
Powell described the forecast rise in unemployment to 4.4% as “a relatively modest increase.”
He allowed for even higher rates than projected in the SEP, saying the FOMC is still trying to figure out how high rates will need to go to “restore balance between supply and demand” and thus decrease what the FOMC called “elevated” inflation.
Since it belatedly admitted late last year that elevated inflation was not merely “transitory,”
the central bank has been bedeviled by 40-year high price surges, as well as by what it views as unsustainable wage gains. Inflation, as measured by the Fed’s preferred PCE gauge (the price index for personal consumption expenditures), rose 6.3% year-over year in July. The consumer price index showed a worsening trend in August, jumping a surprisingly fast 0.6% in the core reading. The total CPI was up 8.3% from a year earlier – down from 8.5% in July and 9.1% in June. but still more than four times the inflation target.
In their revised SEP, FOMC participants forecast that PCE inflation will moderate to 2.8% next year and to 2.3% in 2024, before finally coming down to target in 2025.
But to make that progress against inflation, officials forecast that unemployment will rise from the current 3.7% to 4.4% over the next two years. And they foresee that the fight against inflation will entail real GDP growth slowing to 1.2% next year and 1.7% in 2024. In June, officials had forecast unemployment rising only to 3.9% next year with growth slowing to just 1.7%.
Powell set up today’s aggressive rate action with the blunt message he delivered on Aug. 26 at the Jackson Hole symposium, where he warned of the danger of letting inflation become entrenched and vowed to keep tightening credit to lower inflation “until the job is done.”
“Restoring price stability will likely require maintaining a restrictive policy stance for some time,” Powell said in Jackson Hole. “The historical record cautions strongly against prematurely loosening policy,”
Powell said his position has not changed since then, and he repeatedly told reporters, “we need to bring the federal funds rate to a restrictive level and keep it there for some time.”
At some point, it will become appropriate to slow the pace of rate hikes, but the FOMC won’t think about lowering rates until it sees “compelling evidence” that inflation is on its way down to 2%, he said.
Returning inflation to target is “likely to require a sustained period of below trend growth (and) some softening of labor market conditions,” he said.
Unemployment will rise, Powell acknowledged, “but that’s something we need to have.”
The only way to reduce inflation is to “get supply and demand back in alignment, and the way we do that is by slowing the economy,” he explained.
To slow the economy and reduce demand relative to supply, Powell said, “we believe that we need to raise our policy stance overall to a level that is restrictive. And by that I mean is meaningfully — putting meaningful downward pressure on inflation. That’s what we need to see.”
Powell admitted that determining the appropriate termination point for the funds rate will be “a challenging assessment.” To arrive at a decision, he said, “you look at broader financial conditions. You look at where rates are, credit spreads, at financial condition indexes…..You want to be at a place where real rates are positive.”
Although “we did today do another large increase,” Powell suggested the FOMC is still feeling its way to how high the funds rate will ultimately need to go.
With core PCE inflation running at 4.8%, 4.5%, and 4.8% on a three, six, and twelve-month trailing basis, Powell said, “that’s not where we expected or wanted to be. So that tells us we need to continue, and we can keep doing these. And we did today do another large increase.”
But Powell added, “As we approach the level that we think we need to get to…we’re still discovering what that level” is.
Although the FOMC has now raised the funds rate 300 basis points and sharply increased its projections for further rate hikes, Powell left open the possibility that rates may have to go even higher than now anticipated.
“It’s very hard to say with precise certainty the way this is going to unfold ….,” he said. “(W)hat we think we need to do and should do is to move our policy rate to a restrictive level that’s restrictive enough to bring inflation down to 2% where we have confidence of that.”
Powell said the SEP projections represent FOMC participants’ current assessments of “the kind of levels that will be appropriate,” but he added, “those will evolve over time. and we’ll have to see how that goes.”
“There is a possibility that we would go to a certain level that we’re confident in and stay there for a time,” he went on. “But we’re not at that level. Clearly today we’re just — we’ve just moved into the very lowest level of what might be restrictive.”
“In my view and the view of the committee, there’s a ways to go,” he added.
Powell said the FOMC needs to get the real federal funds rate to a “positive” level of at least “1% or so,” but said, “I don’t know exactly when it would be, but it would be significantly positive when we get to that level ….”
The Fed chief said he and his fellow policymakers are “committed to getting to a restrictive level for the federal fund rate and getting there pretty quickly.”
Powell continually emphasized, “We will keep at it until we’re confident the job is done.”
The FOMC made no changes to quantitative monetary policy, continuing the prescheduled reduction of the balance sheet by allowing up to $95 billion of maturing Treasury and agency mortgage-backed securities to run off per month.
In raising the funds rate by 75 basis points, the Fed lifted other administered rates commensurately. The Board of Governors, the core of the FOMC, lifted the rate paid on reserve balances the same amount to 3.15%. The offering rate on overnight reverse repurchase agreements was raised to 3.05%. The Board raised the primary credit or “discount” rate 75 basis points to 3.25%.