By Chief Economist, Jeanette Garretty

The statement released at the end of the FOMC meeting today was predictable and, quite frankly, a bit boring. The Fed Funds target rate (aka, “the policy target”) was left unchanged at 5.25-5.5%, and the usual “data-driven” waiting-and-seeing language was included. The one notable aspect of the statement was the clear acknowledgment of labor markets being in better balance, inflation being on an improving trend, and the dual mandate of the Federal Reserve being a clear focus of the committee once again. These three points became the theme of the press conference which followed the statement.
Rather than address the substance of the press conference in the usual question-by-question, almost chronological fashion, this latest edition of the almost gladiatorial confrontation of a well-educated press corps and the beleaguered head of the Federal Reserve begs for an over-arching summary. Chairman Powell was (politely, of course) attacked on the possibility that the Federal Reserve/FOMC might once again be late to the party in cutting interest rates. It appeared, as the press conference progressed that Chairman Powell was a bit surprised at the detail and nuance of the attack, including correct citations of previous statements by Powell and the FOMC regarding both the economy and the setting of policy. No better example of this was a question late in the press conference that referenced 2023 statements by Powell that there are significant lags in the response to monetary policy as it is tightened and whether the same would not be true as the Fed eventually loosens policy. “Of course,” was the answer, which was immediately followed by the challenge that this might mean that if the Federal Reserve waits on labor market signals to cut interest rates, the Fed might be “behind the curve” and not able to effectively address a weakening economy. This line of discussion, which was hammered home by reporter after reporter, was invited by a fine bit of FOMC bravado: “We think the economy is doing just fine and that the labor market is ‘normalizing,’ but we are well prepared to act if the weakening turns out to be something more serious.”
Nick Timiraos, the Wall Street Journal reporter known to be close to Chairman Powell, pounced. Why are you going to wait to see the labor market falter to take action? This question revealed Nick’s fine sense that employment is a lagging economic indicator and can deteriorate quite rapidly. Powell’s answer was confident but contradictory to his earlier statements about lags. “If we see something more than [the labor market] softness expected, we are more than prepared to act.” Other reporters asked variations of this question, and one even asked a seemingly ludicrous question about the Fed’s willingness to do a 50 bps rate cut, which could only be understood as a logical question against a backdrop of statements by Powell that the Fed would wait for problems to emerge and then act decisively, from a “catch-up” position.
Adding fuel to this particular fire, Chairman Powell stated that he thought that the unemployment rate was a good, singular statistic for evaluating the health of the labor market (most economists would disagree), agreed that the recent downbeat Beige Book report that showed weakening economic activity in many regions was a worthy data point (even though he did not cite it himself) and accepted that “anecdotal evidence” from the private sector supported the view of a substantial weakening in employment and overall economic conditions. On this latter point, a very astute question pointed out that strength in government (federal, state, and local) hiring might be obscuring weakness in the private sector, a circumstance that Chairman Powell also acknowledged. One reporter mentioned the softness in today’s Employment Compensation Index (ECI), which Chairman Powell agreed was important but, once again, had not brought up in any of his commentaries. The same situation applied to the JOLTS report this week, which one reporter cited as another bit of information about the slowing, weakening job market.
There were some decidedly strange elements to the press conference, contributing to a sense that Chairman Powell was on his back foot, unprepared to address the scrutiny being applied to policy setting (as opposed to a month-to-month reactionary posture.) Waffling on questions regarding the tenor of the discussion at today’s FOMC meeting and finally admitting that there was some divergence of opinion despite the unanimous vote. Referencing “the recovery” when talking about the economy, which, in fact, has been growing for four years now. Stating that “received wisdom” is difficult to apply because the circumstances of the pandemic-driven economy, including its surprising inflation, are so unusual — a stance that the Fed specifically rejected back in 2022. Highlighting “the outlook” while at the same time explaining that it is difficult or impossible to look into the future. “It’s just hard to measure economic activity.” Oh my, isn’t that the same as saying one is flying blind, forced to be reactive instead of proactive?
Choice quotes include: “Really significant decline in inflation. Such a welcome outcome”; “We think we don’t have to be 100% focused on inflation”; “You would think in a base case that policy rates would move down from here”; “I would not like to see further material cooling of the labor market”; “Downside risks to the employment mandate are real now”; “Policy is clearly restrictive”; and “We are in a good place right now.”
The bottom line of this press conference became clear as it progressed. Inflation trends are positive, and the Federal Reserve is quite encouraged. The Fed has now turned its attention to economic growth and, specifically, labor markets, where they are considerably less confident than they are about inflation. This is a substantial reversal of position for the Federal Reserve, and they are trying to figure out how to negotiate the shift, especially given the strident voices back in April (Fed President Kashkari and others) that the Fed might actually need to raise interest rates, based on first quarter data which is known by veteran macroeconomic forecasters to be historically distorted. The Fed doesn’t want to be behind, but it is likely that some discussion at today’s FOMC was probably about how to be seen as not flip-flopping. And labor market trends are bedeviling them once again, something that was first revealed back in 2021. Despite the incessant citation of data-driven decisions, this is a Federal Reserve with a distinct lack of confidence in the economy it seeks to manage.
The penultimate question of the press conference was a much-anticipated question about the Fed’s vulnerability to political influence. Would a September rate cut be problematic, given the Trump campaign’s admonition that the Fed should not put its hand on the scales of the election at that time? For this, Chairman Powell was well-prepared, so much so that one could see him reading from printed notes: “No. Anything we do will be based on the data and the outlook.”
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