My personal notes from reviewing Powell Q&A answers. Bolded key points to skim through and included their timeline on the CNBC FOMC conference video
– attentive to recent data showing resilient econ growth and demand for labor. evidence of growth persistently above potential, or tightness in labor market is no longer easing, could put further progress to inflation at risk and warrant further tightening in monetary policy (5:53)
– inflation been going down, but running well above 2% target, labor market been rebalancing, but still very tight, GDP been strong, but many forecasters think it will slow… committee not confident monetary is sufficiently restrictive yet… these are things in consideration as we look at 10 year yield… monitoring increase in 10 year yields which contributed to tightening of financial condition this summer. Persistent change in financial condition can have implication on monetary policy. tighter financial condition from higher long term rates and stronger dollar and stock prices can matter for future rate decision as long as tighter financial conditions are persistent which remains to be seen and the longer term rate move up cannot be due to expected further hikes from the Fed (doesn't appear to be the case here) so that if the Fed doesn't follow through, the moves will reverse… higher treasury yields means higher borrowing cost for household and weigh on econ activity (8:15)
– If the Fed doesn't hike in Dec doesn't mean it won't raise rates next year” (11:59)
– Fed's staff economists still anticipate soft landing b/c recent econ activity doesn't point to any near term recession… hard to estimate how many rate hikes equivalent to recent tightening financial condition (13:24)
– not thinking about rate cut right now, still focused on determining sufficiently restrictive stance… then for how long : until confident inflation is on sustainable path to 2% (17:07)
– no bias towards 2 more hikes but rather asking should we hike more. (18:55)
– global geopolitics are elevated and Fed monitoring them, UAW strike ending, oil prices are going down, possibility of gov shut down unconfirmed, many risks… but strong econ and labor market, making progress on labor market (19:55)
– still believe likely need to see below trend growth and some softening of labor market… why we haven't seen is because there're 2 processes going on : unwinding of supply disruptions from pandemic, restrictive policy that gives supply chain time to recover. See those 2 working together now, but the first one can bring down inflation without need for higher unemployment + slower growth… getting significant increase in labor supply from immigration and labor force participation, big supply side gain helping the economy and part of why GDP is so high.. welcome that but those things will run their course and we'll be left with some ground to cover with monetary policy (23:25)
– been one year after the 4th 75bps hike… seeing effect of all the hikes last year, debt that haven't been turned out will have to come due next year or the year after when it gets rolled out, things like that where the rate effect take time to impact the economy, not very certain about how long the lags are… that's why we're slowing down to observe these effects (25:16)
– Summary of Economic Projection dot plot is a snapshot in time of what individual members think is appropriate. It's not a plan the committee agree to, and things might change in the future causing members to change their dots. Efficacy of dot plot decay over the 3 month period between each dot plot update (27:20)
– people think trend growth is 2% but with improvement in labor force size due to increase labor participation and immigration, and with supply chain improvement, potential growth can have a catch up phase where you can grow 2% this year but still be going below the potential output of the economy (28:40)
– near the end of rate hike… spread at Sept meeting was a small spread between 1 or 2 additional hikes. It's not a future promise but a belief at Sept meeting. Monetary policy is restrictive (30:09)
– Not considering changing the pace of quantitative tightening (31:20)
– variables in financial conditions we look at : dollar strength, equity or stock prices, level of rates, credit spreads, sometimes credit availability, etc. We wouldn't just look at long term rate in isolation, but along with other standard financial condition variables. (33:15)
– think banking system is resilient, no reason to think these rate hikes will affect the resilience of the banking system. (34:44)
– inflation progress come in lumps… expectation of core PCE YoY by end of next year will be 2 handle, and end of 2025 further down 2 handle.. historically that's consistent with how inflation comes down, take some time, as you go further down from the peak takes further time. (36:30)
– For the first year, the risk was only on not doing enough. We've come far enough that the risk have gotten more two sided. (37:37)
– haven't thought about extending BTFP next year (39:01)
– dismiss UMich inflation expectation survey as the main data for inflation expectation. June 2022 was a preliminary estimate that got revised away, but it led the Fed to increase hiking pace to 75 bps… broad household survey and market based show inflation expectations are anchored (39:30)
– neutral rate is very important but can't identify with precision in real time. know that within range of neutral rate estimates, policy is restrictive and putting downward pressure on econ activity. No group agreement whether R-star has moved up or not, unknowable. Just have to feel your way around after getting to a restrictive policy stance (41:00)
– wage increases have come down significantly in the last 18 months, substantially closer to what is consistent with 2% inflation over time assuming standard productivity, true with ECI released yesterday, true with average hourly earnings. ECI readings came down substantially in June, and Sept stayed flat but validated June decline readings, and broadly close to our expectation. Wages haven't been the driver of inflation, but as we go forward, wages become more important (42:50)
– Policy is clearly restrictive at 5.5%. Using 1 year inflation expectation, you'll see a real policy that's well above mainstream estimate of neutral policy rate. Risk of doing too much VS too little is getting more balanced. (45:20)
– no structural change in consumption. Fed underestimated balance sheet strength of household and businesses, could still be more excess savings than we think. Strong job creation and aggregate wages higher than inflation raise disposable income which drives spending which drives more hiring, while goods availability are better. The whole thing has led to more growth + spending, and we've been achieving progress on inflation the whole time, but question is how long can this continue? The unwinding of pandemic effect has made this econ cycle unique, that process took longer than we thought and we're still learning about how it plays out. (47:47)
– Oil price hasn't spiked from Hamas, not clear at this point if Middle East conflict will have significant econ effect (50:45)
Summary of analysis by economists/pundits (will update by end of day):
– Powell admits the recent financial condition tightening (including 10 year yield) helps the Fed, but didn't want to bless it because it could reverse
– had numerous opportunities but didn't show bias to hike again by pointing out the Sept FOMC dot plot (indicates 1 more hike).
– With inflation at 3% handle, Powell doesn't want to trigger a recession unnecessarily to get inflation back to down 2% as long as the market view the Fed as credible, proven by anchored inflation expectation.
– 2 year rate moving lower shows market thinks the Fed might be done, especially when Powell said the dot plot loses efficacy over time
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