Powell Affirms Rate Hike in March But Stresses Need to Be Nimble

Prepared Remarks

Fed Chair Jerome Powell gave these prepared remarks in a Semiannual Monetary Policy Report to the Congress, emphasis mine.

Ten Key Prepared Statements

1. The labor market is extremely tight. Payroll employment rose by 6.7 million in 2021, and job gains were robust in January. The unemployment rate declined substantially over the past year and stood at 4.0 percent in January, reaching the median of Federal Open Market Committee (FOMC) participants’ estimates of its longer-run normal level.
2. Inflation increased sharply last year and is now running well above our longer-run objective of 2 percent. Demand is strong, and bottlenecks and supply constraints are limiting how quickly production can respond. These supply disruptions have been larger and longer lasting than anticipated, exacerbated by waves of the virus, and price increases are now spreading to a broader range of goods and services.
3. Inflation increased sharply last year and is now running well above our longer-run objective of 2 percent. Demand is strong, and bottlenecks and supply constraints are limiting how quickly production can respond. These supply disruptions have been larger and longer lasting than anticipated, exacerbated by waves of the virus, and price increases are now spreading to a broader range of goods and services.
4. We continue to expect inflation to decline over the course of the year as supply constraints ease and demand moderates because of the waning effects of fiscal support and the removal of monetary policy accommodation. But we are attentive to the risks of potential further upward pressure on inflation expectations and inflation itself from a number of factors. 
5. With inflation well above 2 percent and a strong labor market, we expect it will be appropriate to raise the target range for the federal funds rate at our meeting later this month.
6. As the FOMC noted in January, the federal funds rate is our primary means of adjusting the stance of monetary policy. Reducing our balance sheet will commence after the process of raising interest rates has begun, and will proceed in a predictable manner primarily through adjustments to reinvestments.
7. The near-term effects on the U.S. economy of the invasion of Ukraine, the ongoing war, the sanctions, and of events to come, remain highly uncertain. 
8. Making appropriate monetary policy in this environment requires a recognition that the economy evolves in unexpected ways. We will need to be nimble in responding to incoming data and the evolving outlook.
9. Maintaining the trust and confidence of the public is essential to our work. Last month, the Federal Reserve finalized a comprehensive set of new ethics rules to substantially strengthen the investment restrictions for senior Federal Reserve officials. These new rules will guard against even the appearance of any conflict of interest. They are tough and best in class in government, here and around the world.
10. We understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission. We at the Federal Reserve will do everything we can to achieve our maximum-employment and price-stability goals.

5: Hike Confirmed

Point number 5 affirms the Fed decision to hike in March. It will be a quarter point.

9: Stock Trading Controversy

Point number 9 could hardly be more convenient for the Fed. 

After some FOMC members traded stocks around the time the Fed was about to act on Covid-19, the new rules conveniently have participants out of individual stocks.

CNBC noted Federal Reserve is Surrounded by Controversy

Rosengren, Kaplan and any other Fed officials who traded stocks didn’t violate laws or policies. In fact, that’s become part of the criticism leveled in some circles – that following the financial crisis the Fed didn’t do a housecleaning when it came to internal rules to make sure it avoided the kinds of conflicts that came to light during the crisis.

“Keep in mind, they already have [trading] rules they imposed on banks, for example, and yet the Fed’s governors don’t live by those same rules,” said Christopher Whalen, a Fed veteran and now chairman of Whalen Global Advisors. “After Dodd-Frank [the post-crisis banking reforms], every agency in Washington tightened up little conflicts like insider trading. And yet the Fed is somehow exempt from those rules? They look ridiculous.”

10: Price Stability Is a Joke 

Point number five is clearly a joke. The Fed has massively asymmetric policy that results in huge repetitive stock market bubbles that it does not count as inflation. 

Fed manipulation does not bring stability, it increases instability.

Credibility on the Line

St. Louis Fed President James Bullard created quite a stir on February 14 as noted in Bullard Says Fed Credibility Is On the Line, Repeats Faster Rate Hike Message

Bullard Statements

• We have the hot CPI report. Not so much that report alone, but the last four reports taken in tandem have indicated inflation is broadening and possibly accelerating.
• I am just one person but I would like to see 100 basis points on the policy rate by July 1.
• “I do think we need to front-load more of our planned removal of accommodation than we would have previously. We’ve been surprised to the upside on inflation.
• I think the inflation we are seeing is very bad for low and moderate-income households. Real wages are declining. People are unhappy. Consumer confidence is declining. This is not a good situation.

Bullard did not dissent in January. Let’s see if he dissents in March.

After Bullard spoke, the odds of a half-point hike soared to 97%. 

Powell then trotted out a couple of Fed doves and the odds plunged back towards a quarter-point hike.

 Not Following the Market

The Fed is not following the market.

Via the Fed’s self-proclaimed “tool” called “forward guidance” the Fed steered the market to expect the quarter-point hike you see priced in today.

The Fed Uncertainty Principle and a Big Swift Kick in the Pants

I discussed forward guidance in The Fed Uncertainty Principle and a Big Swift Kick in the Pants

The Fed, by its very existence, has completely distorted the market via self-reinforcing observer/participant feedback loops. Thus, it is fatally flawed logic to suggest the Fed is simply following the market, therefore the market is to blame for the Fed’s actions. There would not be a Fed in a free market, and by implication, there would not be observer/participant feedback loops either.

Corollary Number Three

Don’t expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.

Returning to the Credibility Theme

FED’S POWELL: INFLATION IS UNLIKE ANYTHING WE’VE SEEN IN DECADES.

And Fed Funds are zero and the balance sheet grossly bloated..

— Michael Lebowitz, CFA (@michaellebowitz) March 2, 2022

If all the Fed does is follow the market, why not eliminate the Fed? Better yet, why not eliminate these serial bubble blowers anyway?

This post originated at MishTalk.Com.

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