By Chief Economist, Jeanette Garretty
The FOMC statement released today is, in its language, quite benign. Notably, any language indicating a bias towards hiking interest rates (should inflation pressures return and/or inflation fail to continue to decelerate) has been removed from the statement. Overall, the message of the statement is that the Fed does not feel compelled to do anything at this particular moment and is opting to collect more information on the path of both economic growth and inflation. There will be lots of data between now and the March meeting, and it would seem that the FOMC voted to wait and see where key variables sit in March. The March meeting, by the way, will also be accompanied by an updated Summary of Economic Projections (SEP), requiring FOMC members to put their personal economic forecasts on the table. The SEP is often the basis for a more comprehensive discussion of medium-term monetary policy, and such a discussion is probably required before the FOMC will be prepared to discuss rate cuts openly.
In substance, the FOMC statement is a bit of a mini-bombshell. The wording seems deliberately crafted to send a message to financial markets that the Fed will not be pushed into interest rate cuts by investors and analysts until it is good-and-ready. And it is not ready now.
The opening of Chairman Powell’s press conference continued this theme of slapping back the aggressive expectations of the market for interest rate cuts. While stating the economy had brought “very good news” in recent months, with the supply of workers increasing and the unemployment rate staying low, he immediately referenced that the pace of inflation was still too high, the demand for labor still exceeded supply and “the path forward (on inflation) is uncertain.” This latter point about inflation uncertainty and achieving greater confidence in the inflation numbers became the dominant topic of the press conference, often leading to some highly amusing interactions— including Powell quickly shuffling through papers on his podium looking for the statement itself when asked why the statement failed to mention the possibility of the labor market weakening. At one point, Powell actually seemed to disavow the tenor of the language in the statement, indicating that he had not crafted the language personally (confirming, perhaps, the above-expressed view that the FOMC was trying to make a point more than trying to be a simple statement about policy.)
The sense of frustration and bewilderment on the part of many of the reporters in attendance was almost tactile and is certain to play out in markets over the next few days. “If the path forward is uncertain, what do you need to get greater certainty?” Not really sure, maybe more time, would be a relatively accurate paraphrase of Powell’s responses. “Is there anything in the current data on inflation that leads you to question the accuracy of the readings?” No. “Is there something in particular that you are watching to provide a higher level of confidence in the inflation data?” No. The reporters’ efforts to gain more specificity for the policy decision to keep the Fed Funds target rate unchanged and to signal that there will (maybe) be no rate cuts soon was a bit like watching people trying to tack whipped cream to a wall. The only logical answer to the many questions on this topic was “time.” But then, “How much time do you need if six months of inflation data is not enough?” “Uncertain.” Indeed, “uncertain” was the most over-used word in the press conference, uncomfortably reminiscent of the incessant use of the word “transitory” in 2021.
In fact, one wonders if the many “mistakes” — errors in understanding the complicated things going on in the pandemic economy— constitute the real problem for the Fed. If once-burned-twice-shy is a relevant adage, then maybe this is twice-burned-thrice (thrice+)-shy policy paralysis. The Fed was wrong in its assessment of how long and how strong inflation would become in 2021-2022 and then has been wrong in how fast inflation would come down in 2023. Chairman Powell cited several times in this press conference the ongoing supply chain “healing process” and (rather remarkably) said that he thought it might take several years for the economy to truly get back to “normal.” It would have been highly appropriate for a reporter to ask how to define “normal,” but unfortunately, none took the bait. They may have been tapped-out by the exhausting chase for the meaning of “uncertain.” Powell even conclusively, almost dismissively, declined to state whether the economy was achieving a soft landing, indicating (somewhat in refutation of his December press conference) that it was way too soon to evaluate a soft landing.
So, where does this press conference leave us? On what can the financial markets “hang their hats,” so to speak? Precious little. Powell’s statement that rates are “likely at a peak for this policy cycle” and that “almost everyone on the committee is in favor of moving rates down this year” probably constitutes old news. (Though everyone would love to know who on the committee is NOT in favor of this.) In the new news category, the fact that the committee discussed slowing the run-off in the Fed balance sheet (Quantitative Tightening) and will discuss it in depth in March was moderately surprising. Powell’s answer to a very astute question about the potential coordination between interest rate cuts and QT easing led back to a familiar theme: maybe yes, maybe no. Finally, Powell’s statement that he “doesn’t think it likely that the committee will reach that level of confidence (confidence in economic conditions and inflation in particular) by March” would imply to many observers that expectations for falling Fed Funds target rates should be postponed to well into the second quarter.
The smile-inducing question of the day was near the end, from a reporter who referenced the political winds of change and some skepticism out of Congress on the wisdom of giving Chairman Powell a third term: “Do you WANT a third term?” How Powell kept a straight face during his solemn answer that he had not given this any thought perhaps leads to a conclusion, beyond belief, that he really does want a third term.
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