By Jeanette Garretty, Chief Economist
Today, the Federal Open Market Committee (FOMC) of the Federal Reserve announced a 25 bps Fed Funds rate cut, resetting the target Fed Funds rate to 4.5-4.75%. This represents a full 75 bps reduction in short term rates since the Fed began to move monetary policy to a more “neutral” stance in September. It should be noted— and it was much discussed during the press conference—that longer term bond yields have recently moved in the opposite direction, rising in what may or may not reflect a re-calibration of inflation expectations. Nevertheless, it was made clear that it is the expectation of the FOMC that their efforts to lessen the restrictiveness of monetary policy and ultimately achieve a policy stance that is neither constraining nor accelerating economic growth will be successful, suggesting that all interest rates will eventually move lower.
The FOMC statement itself was one of the shorter in recent memory. The general sense is that the Federal Reserve felt little need to send, or wordsmith, any signals to the markets. The economic environment is currently perceived as a straightforward situation of solid growth in economic activity and reduced inflationary pressures, therefore requiring relatively little explanation. However, the following statement from the FOMC press release became something of a fulcrum for the always-interesting press conference by Fed Chairman Jerome Powell: “In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.” Chairman Powell’s answer to the very first question of the press conference, an inquiry about the impact of the election (of course that would be the first question!), was a doubling down on his (in)famous rejection of forecasting and embrace of being “data-driven.” “The economy remains quite difficult to forecast” beyond the very immediate short term and “we are going to have to see where the data leads us.”
Having spent years adopting the unusual stance of not doing economic forecasts, the Federal Reserve now finds itself in the attractive situation of being able to duck the many questions of “What will you do if . . . “ by reminding people that they do not forecast. Of course, the research department of the Federal Reserve does economic forecasts and contributes to the longer term thinking that is elaborated in the Summary of Economic Projections (SEP), the next of which will be released at the FOMC meeting of December 17-18. Additionally, Chairman Powell answered one question with a very clear exposition of a process in which they do, sort of, forecast; if something is proposed in Congress that is of significance to the economy, the Fed will then begin to evaluate the proposal and begin to think of its longer term impact and begin to model (forecast), so that it can be better prepared to respond if the proposal becomes a full-blown action. However, for the purposes of this particular press conference, with reporters extremely anxious to obtain headlines relating to the recent election, Powell’s statement that the Fed doesn’t forecast and can’t evaluate data that isn’t there from a policy not yet formed, effectively shut down this particular line of thought.
Another line of questioning was also shut down quickly, so stunningly that it seemed to leave everyone speechless in a combination of amusement and awe. When asked if he would resign if the President-elect asked him to resign, Chairman Powell curtly said “No,” almost cutting off the questioner before her sentence was completed. He did cut off the related question, which sounded like “Can you be forced to step down?,” again by saying “No.” There was no elaboration, just this one-word immediate response. Quite frankly, it was a thing of beauty.
The overall theme of the press conference was one of confidence in the strength of the US economy and the success of the Federal Reserve’s inflation-fighting efforts. “We believe that the economy and our policy are in a very good place.” It was stated that 80% of the non-housing services components in the inflation index are back to pre-Covid levels and that the highly-lagged housing services sector continues to provide “understandable and acceptable bumps in the road” to the 2% inflation target. There were several opportunities for Chairman Powell to confirm his belief that the downside risks to economic activity “are diminished,” and the Federal Reserve is on a path to a more neutral monetary policy stance. Given this confidence, it was perhaps a bit jarring to hear him say that “now is not a good time to be doing further guidance” and, with respect to interest rate cuts, “we don’t know the destination, and we don’t know the pace.” However, this would be consistent with his aforementioned reference to his beloved data-driven mantra. A further inquiry about the sorts of things that might fundamentally disrupt the confidence of the Federal Reserve in this economic environment, yielded the single reference to “geo-political events,” with a citation of the considerable turmoil in the world at the present moment.
Several questions highlighted the increase in long term Treasury yields that have been particularly notable since the election results were announced but, in fact have been observable for several weeks now. Chairman Powell indicated that he wasn’t interested in discussing the bond markets at this time, dismissing the current action as probably temporary. He almost said the word “transitory.” There is some risk that this “transitory” interpretation will be just as unsuccessful as the last “transitory” explanation, and it will be interesting to see this revisited at the next FOMC meeting. When pressed by one reporter on the deficit/national debt fears that may be driving bond markets higher, Powell responded “We don’t comment about fiscal policy” and “I don’t have much to say about bond markets.” A steward of monetary policy who doesn’t have anything to say about bond markets is a bit of a puzzlement. On the other hand, Chairman Powell sounded like a perfectly seasoned monetarist when asked why the Fed would not forgo further rate cuts given how well the economy is currently performing: “Even with today’s cut, policy is still restrictive.” In other words, if the economy is doing well and monetary policy is neither restrictive nor expansionary, then one can stop, but not before.
Finally, at the very end of the press conference, Chairman Powell made a statement that essentially dismissed a controversial policy put into place before COVID and still, theoretically, in effect. Specifically, in 2019, it was announced that longer term Fed policy would target average inflation rates, allowing it to accept higher-than-average rates of inflation after a certain period of below-average rates of inflation and vice-versa. When a reporter asked if the Fed would pursue a below-2% inflation rate in order to mitigate the impact of inflation well above 2%, the reporter was asking from the standpoint of ameliorating the effect of higher prices on people’s pocketbooks. But in saying that the Fed has no interest in doing that, one could question whether Chairman Powell was finally laying-to-rest a policy construct that hasn’t been followed much and that many economists and observers are expecting to be reformulated soon.
As usual, we end with the most “unexpected” (aka “ridiculous”) question of the press conference: “What will be your policy if we see stagflation?” Chairman Powell actually laughed at this, most likely in relief at the charming out-of-nowhere nature of this question at the very end of the presser. Undeterred, the reporter followed up with an even more tone-deaf question: “Can you rule out an interest rate hike next year.” It is recommended that no one spend a great deal of time seeking out the publication for which these questions were intended to illuminate the discourse.
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