By Steven K. Beckner
(MaceNews) – As the Federal Reserve’s penultimate monetary policy meeting of 2023 rapidly approached, Fed officials collectively leaned against another short-term interest rate hike, while expressing hope that rising long-term rates might substitute for Fed rate action.
By no means, though, did they rule out additional monetary tightening to fight inflation, which continues to run roughly double the Fed’s 2% target.
For now, the comments of Fed Chair Jerome Powell and his colleagues showed officials seemingly in concert on leaving monetary policy unchanged at the Oct. 31-Nov. 1 meeting of the Fed’s rate-setting Federal Open Market Committee. It would be the first time the FOMC has skipped raising rates at two consecutive meetings since it stopped holding the federal funds rate near zero in March of last year.
Fed officials did not close the door on the “one more increase” in the federal funds rate which minutes say “a majority” favored at the September FOMC meeting But, they strongly suggested they will defer another rate hike until at least the Dec. 12-13 meeting.
Officials reaffirmed their commitment to reducing inflation to the FOMC’s 2% target over time, but after 525 basis points of hikes in the federal funds rate they indicated they were in no hurry to make a twelfth move. A common theme was the need to proceed “carefully” and exercise “patience,” despite stronger than expected economic growth, still tight labor markets and ongoing wage-price pressures.
Even reputed “hawks” like Fed Gov. Christopher Waller and Dallas Federal Reserve Bank President Lorie Logan seemed content this week to bide their time on further policy tightening. How long that consensus lasts remains to be seen, especially if economic and labor market data remain strong and/or if disinflation stalls.
Powell set the tone but did not significantly alter the message he delivered in late September.
“Given the uncertainties and risks, and how far we have come, the Committee is proceeding carefully,” he told the Economic Club of New York, “We will make decisions about the extent of additional policy firming and how long policy will remain restrictive based on the totality of the incoming data, the evolving outlook, and the balance of risks.”
After pointing to progress on reducing inflation, Powell said it is “still too high, and a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal. We cannot yet know how long these lower readings will persist, or where inflation will settle over coming quarters.”
“While the path is likely to be bumpy and take some time, my colleagues and I are united in our commitment to bringing inflation down sustainably to 2%,” he added.
Powell stressed that he and his fellow policymakers “are committed to achieving a stance of policy that is sufficiently restrictive to bring inflation sustainably down to 2% over time, and to keeping policy restrictive until we are confident that inflation is on a path to that objective.”
Laying out a potential case for the resumption of rate hikes, he said, “We are attentive to recent data showing the resilience of economic growth and demand for labor. Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy….”
But Powell also suggested that the spike in bond yields gives the FOMC reason to extend its pause for now: “Financial conditions have tightened significantly in recent months, and longer-term bond yields have been an important driving factor in this tightening. We remain attentive to these developments because persistent changes in financial conditions can have implications for the path of monetary policy…..”
Powell also reiterated the “risk management” considerations that the FOMC is employing: “A range of uncertainties, both old and new, complicate our task of balancing the risk of tightening monetary policy too much against the risk of tightening too little. Doing too little could allow above-target inflation to become entrenched and ultimately require monetary policy to wring more persistent inflation from the economy at a high cost to employment.”
Newly installed Fed Vice Chairman Phillip Jefferson had previously said the Fed should “balance the risk of not having tightened enough, against the risk of policy being too restrictive.” And, like Powell, he said the FOMC should “proceed carefully.”
With the 10-year Treasury note yield having risen some 90 basis points since July, Jefferson said he would “remain cognizant of the tightening in financial conditions through higher bond yields and will keep that in mind as I assess the future path of policy.”
Waller has been one of the more “hawkish” policymakers, but after weighing different potential scenarios on Wednesday, he indicated that he too is in a wait and see mode:
“I will be looking carefully at the data to see whether the real side of the economy begins to cool off or weather prices, the nominal side of the economy, heat up,” he said. “As of today, it is too soon to tell.”
“I believe we can wait, watch and see how the economy evolves before making definitive moves on the path of the policy rate,” Waller continued. “Should the real side of the economy soften, we will have more room to wait on any further rate hikes and let the recent run-up on longer-term rates do some of our work.”
Waller added the caveat that “if the real economy continues showing underlying strength and inflation appears to stabilize or reaccelerate, more policy tightening is likely needed despite the recent run up in longer term rates.”
But for now, he seemed content to watch how things unfold.
“So, I will be watching to see if core inflation comes in higher than expected, perhaps sustained by continued strength in spending and investment or, if demand and the real economy slow, moderating core inflation,” Waller said. “My views on the appropriate path for policy will be based on a careful assessment of incoming data and financial market developments and a judgement about whether we are continuing on a path of sustained progress toward 2% inflation.”
Logan, another reputed “hawk” and a voter, made clear Thursday she’s still not sure the Fed has tightened enough to get inflation down to 2%, but she said the tightening of financial conditions has given the Fed “some time” to watch the data and decide what to do with rates.
“My focus is on price stability and what further tightening may be needed to achieve our mandate,” she told the Money Marketeers.
Logan, who ran the New York Fed’s open market trading desk before becoming Dallas Fed president, said that if tighter financial conditions are “persistent that could mitigate some of the need for further increases.”
Logan has been more nuanced than some of her colleagues in assessing tighter financial conditions, particularly higher bond yields and longer term interest rates, arguing it matters enormously why yields have spiked – whether it’s because of higher term premiums or because of concerns about excessively strong growth and labor market tightness that would imply more monetary tightening.
Other factors have also been at work, notably concern about federal deficits and consequent Treasury financing needs. So Logan has suggested it’s not cut-and-dry for the FOMC to conclude that tighter financial conditions allow it to stay on hold. But for now, she seems content to do so.
Before others came around to the view that the FOMC should continue to pause rate hikes,
Philadelphia Fed President Patrick Harker led the way in making that case, and he reiterated that position several times this week, most recently on Friday.
“(W)e are at the point where holding the policy rate steady is the prudent position to take….,” he said.
Harker seemed unfazed by stronger than expected consumer demand and GDP growth. He admitted the surprising 0.7% rise in September retail sales was “a bit of a head scratcher,” but said “economic and financial conditions are continuing to evolve as I have been expecting….There has not been the abrupt shift in data that would lead me to change my current position.”
Like others, Harker said, “we are not going to tolerate a reacceleration in prices” and said he will “stand ready to revise my views and act accordingly if I see signs of reinflation,….”
But he said “a steady disinflation … is already under way and sustained, if slow,” leading him to believe the FOMC has done enough for now.
“We raised the policy rate by more than 5 percentage points in the span of a little more than a year,” he said. “That’s a lot of change in not a lot of time. We know that the full impacts of those increases may not yet be fully absorbed across the economy. We also turned around our balance sheet with near equal speed. We put ourselves in restrictive territory very quickly.”
“But the speed with which we worked then is also part of my argument for holding steady now…,” Harker continued. “(P)olicy rates are restrictive, and holding them steady now will keep us in restrictive territory and steadily pressing down on inflation. This is a time where doing nothing is doing something, and, in fact, I’d argue that it equates to doing quite a lot.”
Given what he called “a steady disinflation” and his expectation that growth and labor market tightness will moderate, Harker said, “we need to exhale, allow the policy actions we’ve taken to continue to work, and closely watch the data before making any decisions on moving the policy rate in either direction. A resolute, but patient, stance on monetary policy will allow us to achieve the soft landing that we all wish for our economy.”
Other officials have tilted in the same direction this week.
Richmond Fed President Thomas Barkin, a non-voter this year, supported the general consensus that the FOMC can afford to wait and see before tightening monetary policy. Like others, he said the Fed must avoid doing too little but also too much.
““I see an economy that is much further along the path to demand normalization than much of the data would tell you,” he said. “But the path for inflation isn’t yet clear. That’s why I supported our decision at our last meeting to keep rates steady and wait for more information….,”
Barkin added that “we have time to see if we have done enough, or whether there’s more work to do…..”
“(W)e are walking a fine line,” he went on. “If we undercorrect, inflation re-emerges. If we overcorrect, we do unnecessary damage to the economy…..”
Commenting on inflation and the supposed supply-demand imbalance, Barkin said, “Demand is weakening as long-term rates rise. Demand is weakening because credit conditions tightened….
I am still looking to be convinced, both that demand is settling and that any weakness is feeding through to inflation…..”
As for getting to 2% inflation, he said, “We aren’t there yet, but we’re headed in the right direction…..”
Cleveland Fed President Loretta Mester wound up the week’s official commentary by suggesting that she too supports leaving rates unchanged for the time being. But she indicated she favors at least one more rate hike.
“Regardless of the decision made at our next meeting, if the economy evolves as anticipated, in my view, we are likely near or at a holding point on the funds rate as we accumulate more information on economic and financial developments and assess the effects of the tightening in financial conditions that has already occurred,” the usual hawk said.
With an eye toward soaring bond yields, Mester said, “If sustained, the increase in longer-term yields will help to moderate demand, and as one of the financial conditions we monitor, it will be one of the factors I consider when evaluating the appropriate path of monetary policy going forward.”
Mester said that “in light of the cyclical and structural uncertainties and the need to balance risks, policy decisions will need to be guided by actual progress on our dual mandate goals, in particular, whether the rate of progress we have seen on inflation in recent months is sustained and whether labor market conditions remain healthy as they moderate.”
“Because the outlook and balance of risks can change, policymakers will need to be nimble in order to appropriately calibrate policy in the midst of such changes,” she continued. “This will require us to carefully monitor economic, banking, and financial market developments…..”
Noting that a majority of the FOMC projected one more rate hike this year, Mester said, “This is consistent with my own reading of economic conditions, the outlook, and the risks to the outlook.”
“But whether the fed funds rate needs to go higher than its current level and for how long policy needs to remain restrictive will depend importantly on how the economy evolves relative to the outlook and how the risks are changing…,” she continued.
Mester echoed others in saying “risk management considerations are becoming increasingly important as we set monetary policy in a way that balances the costs over time of potentially over-tightening vs. under-tightening monetary policy.”
“Tightening too much would slow the economy more than necessary and entail higher costs than needed to get inflation back to our goal,” she elaborated. “Tightening too little would allow high inflation to persist, with short- and long-run consequences, and would necessitate a much longer and more costly journey back to price stability…..”
Mester listed “two important considerations for calibrating monetary policy going forward are how much of the past tightening is yet to transmit through the economy and how restrictive monetary policy is.”
“(P)ast changes in monetary policy may be felt for some time to come in the economy….,” she said, adding that “while monetary policy is currently widely viewed as restrictive, the resilience the economy has shown in the face of high interest rates has underscored the difficulty of knowing precisely how restrictive policy is partly because of the uncertainty about the level of the neutral real interest rate, so-called r-star…..”
Mester suggested she’s tempted to raise her estimate of the longer-run neutral rate: “(I)n the aftermath of the pandemic, estimates of the short-run neutral rate rose; whether the increase will persist is an open question……I have not yet raised my estimate of the long-run equilibrium interest rate but will consider doing so depending on how the economy evolves.”
Amid all the Fed speeches this week, the Fed’s beige book survey of conditions around the country seemed to show things moving in the FOMC’s desired direction.
For instance, the report said, “Most Districts indicated little to no change in economic activity since the September report.” It said “labor market tightness continued to ease across the nation” and that “wage growth remained modest to moderate in most Districts.”
And on the price front, the beige book said, “Sales prices increased at a slower rate than input prices, as businesses struggled to pass along cost pressures because consumers had grown more sensitive to prices. As a result, firms struggled to maintain desired profit margins. Overall, firms expect prices to increase the next few quarters, but at a slower rate than the previous few quarters.”
As they approach the next FOMC meeting policymakers face a complex set of considerations and calculations:
* Though tightening financial conditions are seen potentially doing some of the Fed’s work for it, there is great uncertainty about what is driving yields higher;
* economic data are not cooperating with the Fed. Stronger than expected economic growth is keeping alive Fed inflation worries;
* inflation has come down but so-called “supercore” measures remain stubbornly high, and
* there is uncertainty about just how “restrictive” monetary policy really is.
Differing interpretations of these factors could make for less unanimity on the FOMC going forward.