– Powell Signals More Hikes to Come but Unclear About Pace, Level
– Powell Repeats Fed Needs ‘Compelling Evidence’ Inflation Heading To 2% Target
– Amid Slowing, Powell Cites Risk of ‘Doing Too Much’ Or ‘Too Little’ Tightening
– Powell Repeats Need ‘Moderately Restrictive’ 3-3.5% Funds Rate Range End-22
By Steven K. Beckner
(MaceNews) – Federal Reserve policy-makers took another relatively aggressive step toward a tighter monetary policy Wednesday, raising short-term interest rates by 75 basis points for the second straight meeting as most had come to expect.
The Fed’s rate-setting Federal Open Market Committee served notice that further increases are coming, but Chair Jerome Powell was deliberately vague about how rapid future rate hikes will be or at what level they should eventually settle.
Powell reiterated that the FOMC intends to keep raising rates until it sees “compelling evidence” that inflation is starting to recede toward the Fed’s 2% target, and he repeated that the FOMC wants to get the federal funds rate to a “moderately restrictive” range, but suggested the pace of rate hikes could slow at coming meetings.
While Powell continued to point to high inflation as the Fed’s top priority, he also expressed increased concern about downside risks to the economy following reports of softer consumer spending, manufacturing, housing, and other areas of economic activity.
The FOMC’s next meeting Sept. 20-21, when participants will be compiling a fresh set of economic forecasts and rate projections, could be a critical point for deciding how much more needs to be done to bring inflation, judging from Powell’s comments.
Eschewing the full percentage point rate hike which some had urged or anticipated, the FOMC unanimously raised the funds rate three quarters of a point to a target range of 2.25% to 2.5%. It was the second straight such rate hike, which had hitherto not been raised that much since 1994.
The latest increase – the fourth since the FOMC stopped holding the funds rate near zero in March – takes that overnight money market rate close to the Fed’s estimated “longer run” or “neutral rate” of 2.5% – a fact Powell pointed to in his post-FOMC press conference.
The FOMC signaled further monetary tightening to come by repeating its expectation that “ongoing increases in the target range will be appropriate.”
But in wake of proliferating signs of economic cooling, Powell toned down his “forward guidance” on further monetary tightening, saying the FOMC no longer sees this as fruitful now that the Fed has “front-loaded’ rate hikes to get to a “neutral’ policy stance.
In its characterization of economic conditions, the FOMC policy statement dropped the June assertion that “overall economic activity appears to have picked up after edging down in the first quarter.” Instead, it says, “recent indicators of spending and production have softened.”
The statement again blamed the war in Ukraine for “creating additional upward pressure on inflation” and for “weighing on global economic activity,” but it deleted reference to China Covid lockdowns “exacerbat(ing) supply chain disruptions.”
Elaborating on downside risks in his comments to reporters, Powell denied the economy is in recession, saying the labor market is too strong to be consistent with an economic downturn. But he acknowledged “recent indicators have softened.”
“Consumer spending has slowed considerably,” and “the housing market has weakened,” he noted, citing tighter financial conditions, including higher mortgage rates, as causes.
But Powell betrayed no sense of alarm, in large part because the labor market remains “remarkably strong.”
Besides, he said, “we think it’s necessary to have growth slow down.” He said growth needs to slow from last year’s strong pace, accompanied by a cooling labor market, as part of the Fed’s effort to reduce inflation by bringing demand down relative to supply.
“We need a period of growth below potential … to create slack so supply can catch up,” he said. “Some softening of the labor market is probably necessary if we’re to get inflation back down to 2%.”
Powell said the Fed still hopes to achieve a “soft landing,” but conceded, “the path has narrowed and may narrow further.”
The Fed faces “two-sided risks,” Powell said. There is a risk of doing too much and imposing more of a downturn than is necessary, but if we do too little that only raises the cost of doing it later.”
“It’s important that we address this (high inflation) now and get it done,” he added.
Powell was repeatedly pressed on how much more tightening the Fed will do and how fast, but he refused to be very specific beyond saying Fed officials’ rate projections are still “largely in line” with those FOMC participants made in their June quarterly Summary of Economic Projections (SEP).
“That’s probably the best guide we have as to where the Committee needs to get this year and next,” he added.
In the June SEP “dot plot,” the median funds rate projection for 2022 was 3.4%, rising to 3.8% in 2023. Powell said the FOMC’s aim is still to get to a “moderately restrictive” funds rate range of 3 to 3 ½% by the end of the year and to raise it a bit more next year. But he stressed that rate forecasts are subject to great uncertainty.
Powell said he and his colleagues have decided, henceforth, to decide on the appropriate size of rate hikes “meeting by meeting” and “not provide the kind of clear guidance we had been providing on the way to neutral.”
Looking ahead to the Sept. 20-21 FOMC meeting, he said “another unusually large rate increase could be appropriate,” but said “that will be dependent on the data we get between now and then.”
Noting the FOMC will be getting two employment and inflation reports between now and the next meeting, Powell said the FOMC will be looking at an array of data. Above all, he said, “we will be looking for compelling evidence that inflation is moving down.”
At some point, the pace of rate hikes will inevitably moderate, Powell said. “As the stance of monetary policy tightens further, we will likely slow the pace of rate increases as we assess how (past rate hikes) are affecting the economy and inflation.”
He said the full extent of past rate hikes has not been felt, given the lags with which they take effect. He said there is “significant tightening already in the pipeline.”
Powell also emphasized that “the economy often evolves in unexpected ways” in today’s globally uncertain environment. So, the Fed will “need to be nimble in response to incoming data and the evolving outlook.”
Repeatedly stressing the Fed’s commitment to returning inflation to 2%, Powell asserted, “we’re going to get policy to a level where we’re confident – confident – that inflation is coming down.”
The FOMC also continued to reverse the heavy bond buying it did after the pandemic hit in March 2020 to lower long-term rates. As planned, the FOMC reaffirmed that the Fed will allow a larger amount of maturing securities to roll off, starting Sept. 1.
In an implementation note, the FOMC directed the New York Federal Reserve Bank’s open market trading desk as follows: “Starting in the calendar month of September, roll over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing in each calendar month that exceeds a cap of $60 billion per month. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap.”
The Desk was directed to “reinvest into agency mortgage-backed securities (MBS) the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency MBS received in the calendar months of July and August that exceeds a cap of $17.5 billion per month.” Then, “starting in the calendar month of September, reinvest into agency MBS the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency MBS received in each calendar month that exceeds a cap of $35 billion per month.”
In raising the funds rate 75 basis points, the FOMC and the Board of Governors at its core also lifted other administered rates commensurately. The FOMC lifted the rate paid on reserve balances the same amount to 2.4%. Similarly, the offering rate on overnight reverse repurchase agreements was raised to 2.5%. The Board raised the primary credit or “discount” rate 75 basis points to 2.5%.