Powell pivots!

And goes full Volcker

At every single meeting since the start of the rate rise cycle just over year ago, the Fed has pivoted further towards a more hawkish stance. Powell pivoted further today and repeatedly and purposefully, hammered home his message so there would be no misunderstanding and no misinterpretation.

The press statement issued with the notice of the expected 75bps rate rise was initially misinterpreted by the media (that had been convinced the Fed would relent) as dovish. Well Powell put that idea to rest.

He used the word “premature” three times during the press conference in relationship to “thinking about pausing” and “talking about pausing.

“Let me say this, it is very premature to be thinking about pausing. When they (the media) hear “lags,” they think about a pause. It’s very premature in my view to be thinking about or talking about pausing our rate hikes. We have a ways to go. We need ongoing rate hikes to get to that level of restrictive,” he said.

Later he said,

“Okay, so I would also say it’s premature to discuss pausing. It’s not something that we’re thinking about. That’s really not a conversation to be had now. We have a ways to go.”

In plain English - you can forget about pausing let alone pivoting for the foreseeable future,

As Powell was reading his prepared statement at the beginning of the press conference the markets were still assuming a dovish bias, but then he made this observation.

“At some point, as I’ve said in the last two press conferences, it will become appropriate to slow the pace of increases, as we approach the level of interest rates that will be sufficiently restrictive to bring inflation down to our 2% goal. There is significant uncertainty around that level of interest rates. Even so, we still have some ways to go, and incoming data since our last meeting suggest that the ultimate level of interest rates will be higher than previously expected.”

Nick Timiraos, economics correspondent for the Wall Street Journal, and self-proclaimed “Fed Whisperer” then asked him if the Federal funds rate would have to move above core PCE, which is the Fed’s yardstick currently at 5.1%.

“I think the answer is we’ll want to get the policy rate to a level where the real interest rate [federal funds rate minus core PCE] is positive. We will want to do that. I do not think of it as a single and only touch stone, though…. I wouldn’t say it’s something that is the single dominant thing to look at.”

Again, in plain English - Yes, the rate is going a lot higher than you currently think.

“The historical record cautions strongly against prematurely loosening policy. We will stay the course, until the job is done.”

and I have history on my side on this.

The press actually managed to ask some incisive questions for a change but were all focused on when the Fed will slow, pause or pivot.

He was asked regarding rate rises, “How fast, how far and for how long. In response he said this:

“So, on the first question, how fast to tighten policy. It has been very important that we move expeditiously, and we’ve clearly done so. We’ve moved 3 3/4 percentage points since March, from zero. That’s a fast pace and certainly appropriate given the low level from which we started.”

“To the second question, how high to raise the policy rate. We have to raise to the level that is sufficiently restrictive to bring inflation to 2% target over time. We put that into our post-meeting statement. Because that really does become the important question now, how far to go.

“We think there is some ground to cover before we meet that test. That’s why we say that ongoing rate increases will be appropriate. As I mentioned, incoming data between the meetings, both the strong labor market report but particularly the CPI report, suggest to me that we may move to higher levels than we thought at the September meeting. That level is very uncertain, though. I would say we’re going to find it over time.

“As we move more into restrictive territory, the question of speed becomes less important than the second and third questions. That’s why I’ve said it’s appropriate to slow the pace of increases. So that time is coming. And it may come as soon as the next meeting or the one after that. No decision has been made. It is likely we’ll have a discussion about this at the next meeting.”

“To be clear, let me say again, the question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restrictive, which will be our principal focus.”

Again, absolutely no suggestion of a pivot and if it means tipping the US into a recession then so be it.

He was then asked, “If rates have to go higher and stay higher for longer, did he think a soft landing was still possible.”

In terms of a soft landing, we’ve always said it was going to be difficult. I think to the extent rates have to go higher and stay higher for longer, it becomes harder to see the path. It has narrowed. I would say the path has narrowed over the course of the last year. It’s hard to say.

In other words, “No”

On labour markets he said

“I would say a big challenge is the labor market. The labor market is very, very strong. Households, of course, have strong balance sheets. We go into this with a strong labor market, and excess demand in the labor market…. Also, households have strong spending-power built up. So it may take time. It may take resolve and patience. It’s likely to get inflation down. I think you see from our forecasts and others, that it will take some time for inflation to come down. It will take time, we think.”

Again, in plain speak - If we don’t crush wages growth and consumer spending we’re doomed to embedded inflation and an emerging market style economy.

And finally

“The last thing I’ll say is that I would want people to understand our commitment to getting this done, and to not making the mistake of not doing enough, or the mistake of withdrawing our strong policy and doing that too soon.”

He couldn’t have been much clearer, could he? So higher rates, higher bond yields, stronger dollar and nowhere else to hide from the recession that is beginning to look inevitable. This bear market is not over.

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