The Fed did what it was expected to do today, raising interest rates by another quarter of a percentage point (that’s 25 basis points). How many more rate hikes will we see? Will the Fed take a break here or keep walking?
Fed Chairman Jerome Powell answered these questions and more during today’s press conference.
If your BINGO card had “raises in progress” you can bookmark this site. You can check two more places if you had “more work to do” and “restrictive for a while”.
You could also mark a spot if your card included the question, “Would the Fed accept a trillion dollar Treasury platinum coin?” But you may not have realized that was the question.
If you missed the live commentary, you can watch it in its entirety here. If you have time and just want a rough summary, I’m here with another tl; Dr. So here’s my (very) loose paraphrase of the Q&A portion of the press conference.
Question: Financial conditions have loosened since the fall. The market has gone up. Will you have to work hard to quell Wall Street’s enthusiasm?
Powell: Financial conditions have tightened very significantly over the past year. And we’re not done yet.
Question: Inflation is slowing. Can’t we just let this happen? Do you still think we need to see a rise in unemployment to bring inflation back to target?
Powell: We can tell a good story about deflation except where it matters most: basic services from the home. And that’s bad news.
Question: it’s january Have your views on inflation changed since December?
Question: You have tried to bring the ratio of job openings to job applicants closer to equilibrium. The ratio just went up.
Powell: I know. The job market is stubbornly strong.
Question: Still think you’ll have to raise rates to 5.25 percent?
Powell: This was our vision for December. We will let you know in March.
Question: You are walking a fine line. How do you see the balance of risk?
Powell: We could do too much. If we push too hard, we can reverse course quite easily. But if we do too little, inflationary expectations could get rich, and then we’ll be accused of “disappearing” like Arthur Burns.
Question: Financial markets want to put inflation in the rearview mirror. You think they are making progress.
Powell: The deflation process has begun. We see this more clearly in the goods sector, where we actually have transitory deflation. We know that deflation is coming in housing services. And we hope to see it soon in basic services ex housing, but we don’t see it yet. And that is our focus. Until we see it there, we are not convinced that inflation is in the rearview mirror.
Question: you were bad in the past re: the Phillips curve. You might be wrong again. So why not pause now and see if inflation will continue to fall even as the labor market remains strong?
Powell: The story we are telling ourselves is that the Phillips curve is correct.
Question: In the privacy of your closed-door meetings, is the FOMC talking about what, specifically, it will take to get to the end of this tightening cycle?
Powell: We talk about many things. You can read the minutes when they come out.
Question: When Secretary Yellen sends you a trillion dollar platinum coin, you will either credit the Treasury General Account (TGA) without hesitation, in accordance with your duties as a fiscal agent, or feel that you need to check first -with the legal advice?
Powell: Um, can you repeat the question.
Question: You are the fiscal agent of the Treasury. If a platinum coin appears, what do you do?
Powell: So you are asking about the priority of payments.
Question: The Fed has raised rates at every meeting since March 2022. Instead of talking about “increases in progress”, there has been talk of pausing and restarting rate hikes if you think they need to be done later during the year?
Powell: Obviously, we didn’t take a break today and anticipate the need for further rate hikes. We will write down new forecasts in March.
Question: I understand that. What I’m asking you is, you can have empty in the squeeze? Like a pause and then a restart if inflation doesn’t go down as you want?
Powell: There was a time when the Fed would hike every other meeting and was considered fast. Now we go to every meeting.
Question: The December Summary of Economic Projections (SEP) already seems inconsistent with the facts on the ground. Could your understanding of the dynamics of inflation be wrong?
Powell: Deflation of goods is transitory. To bring core PCE back down to 2 percent, we will need to see better balance in the labor market. We I could get there without a significant decline in economic activity and an increase in employment.
Question: Can we get there if you stop raising rates after they hit 5 percent?
Powell: There is an opportunity.
Question: Recession indicators are flashing red. They are telling us that we are going to see a recession this year. You’ve done a bunch of contractions that haven’t hit you yet. Are you about to plunge us into recession?
Powell: Well, there are a lot of tailwinds. The job market is “very, very strong.” We believe we will achieve sufficient growth to avoid recession. State and local governments are flush with cash, and federal spending is also underway.
Question: When you say the Fed needs to see “substantially more evidence” that inflation is coming back, how many months are we talking about? Or are you really focused on the job market?
Powell: We want many things to go down, but especially wages.
Question: We have seen inflation come down without hitting the labor market. Is the hard part yet to come? Could inflation be stuck at much higher than 2 percent?
Powell: I could. We are in deflation, but “we have a long way to go.”
Question: How long do you expect to keep interest rates high?
Powell: Don’t expect rate cuts this year.
Question: You talk about “increases in progress”, which implies at least two more hikes. Markets expect one more rate hike, followed by a pause. Who is right?
Powell: We have different opinions, and I don’t mind the divergence. The market is optimistic. I don’t see us lowering rates this year.
Question: Does the pandemic no longer weigh on the economy? You have left out references to public health in your assessment of economic conditions.
Powell: Finally, you have to remove it. We are “handling” COVID better, so it’s not an ongoing process economic risk, although it remains a Health matter
Question: Vice President Lael Brainard isn’t worried about a wage-price spiral. Do you agree?
Powell: We don’t see it, but that doesn’t mean it isn’t a risk.
Question: Do you think consumer expectations are important?
Powell: Inflation expectations are a very important part of the inflation creation process. But expectations are “well anchored” so I agree with VP Brainard.
Question: In the minutes of December, the Fed expressed its concern about an unwarranted relaxation of financial conditions. You didn’t mention it today. Is it still a concern?
Powell: Markets must reflect the tightening of financial conditions because We they are squeeze. And don’t forget, we hope to keep the rates higher for longer.
Question: Does the Fed take the debt ceiling into account when working out its balance sheet? More aggressive quantitative easing (QT) causes the Treasury to raise the debt ceiling even faster.
Powell: It’s hard to think about our role in speeding up the timeline. It’s really up to Congress to act. If they don’t raise the debt limit, it puts everything at risk: the economy, the financial markets, inflation.
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