The Federal Reserve posts a Transcript of Powell’s Speech on Inflation and the Labor Market.
Powell put a spotlight on core Personal Consumption Expenditures (PCE) inflation, noting that it is stubbornly high despite the Fed’s rate hikes.
Key Powell Comments (Emphasis Mine)
Twelve-month core PCE inflation stands at 5.0 percent in our October estimate, approximately where it stood last December when policy tightening was in its early stages. Over 2022, core inflation rose a few tenths above 5 percent and fell a few tenths below, but it mainly moved sideways. So when will inflation come down?
I could answer this question by pointing to the inflation forecasts of private-sector forecasters or of FOMC participants, which broadly show a significant decline over the next year. But forecasts have been predicting just such a decline for more than a year, while inflation has moved stubbornly sideways. The truth is that the path ahead for inflation remains highly uncertain.
For starters, we need to raise interest rates to a level that is sufficiently restrictive to return inflation to 2 percent. There is considerable uncertainty about what rate will be sufficient, although there is no doubt that we have made substantial progress, raising our target range for the federal funds rate by 3.75 percentage points since March.
Despite the tighter policy and slower growth over the past year, we have not seen clear progress on slowing inflation.
In the labor market, demand for workers far exceeds the supply of available workers, and nominal wages have been growing at a pace well above what would be consistent with 2 percent inflation over time. Thus, another condition we are looking for is the restoration of balance between supply and demand in the labor market.
Looking back, we can see that a significant and persistent labor supply shortfall opened up during the pandemic—a shortfall that appears unlikely to fully close anytime soon.
Many forecasters expected that participation would move back up fairly quickly as the pandemic faded. And for workers in their prime working years, it mostly has. Overall participation, however, remains well below pre-pandemic trends.
Recent research by Fed economists finds that the participation gap is now mostly due to excess retirements—that is, retirements in excess of what would have been expected from population aging alone. These excess retirements might now account for more than 2 million of the 3‑1/2 million shortfall in the labor force.
The data so far do not suggest that excess retirements are likely to unwind because of retirees returning to the labor force.
It is likely that restoring price stability will require holding policy at a restrictive level for some time. History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.
Interview with David Wessel, Hutchins Center Director
An interview with Wessel following Powell’s speech was a discussion of job openings, supply constraints, wage inflation, and whether or not de-globalization and decarbonization will add to inflation.
In response to a question about de-globalization and decarbonization, Powell said he “didn’t know”.
Although no one ever really knows such things with 100 percent certainty, it’s hard to conclude anything other than de-globalization and decarbonization will add to inflation.
Powell then said “Assume it’s true. We still have our 2 percent inflation targets. We tend to assume things will go back to the way they were but that does not seem to be happing so far.”
In response to Wessel’s question regarding a soft landing, Powell refused to handicap the odds, only stating that it was plausible. “It’s still achievable,” said Powell, adding that “If you look at history it’s not a likely outcome.”
So far this is still market bearish.
There is little if anything at all in Powell’s speech and the following interview that represents a pivot or even an end to rate hikes.
The audience Q&A then started at the 43:51 mark in the video above.
Market Hopium
It was the Q&A, not Powell’s prepared speech or the interview that ignited the markets.
In response to a question on risk management Powell said “One risk management technique is to go slower and feel your way a little bit to what we think is the right level. Another is to hold on longer at a high level and not loosen policy too early.”
“My colleagues and I do not want to overtighten because cutting rates is not something we want to do soon. That’s why we’re slowing down, and I’m going to try to find our way to what that right level is.”
In response to a question on a shock and awe approach vs going slower, Powell said “We would not raise rates and try to crash the economy and clean up afterwards. The right thing to do is to move rally quickly as we have, and now slow down and get to that place we need to be.”
Powell does “not want to get rid of inflation at a high human cost.”
Market Took Off
Powell was not particularly dovish and the rate hike odds have already collapsed.
Yet, the market was looking for hopium and found it in the Q&A. The lead chart shows the picture.
Housing Bubble Admission
The Q&A then ended on an interesting housing question and Powell’s answer.
“Coming out of the pandemic, rates were very low, people wanted to buy houses, they wanted to get out of the cities and buy houses in the suburbs because of Covid. And so you really had a housing bubble, … very unsustainable levels and overheating. Now the housing market is going through the other side of that,” said Powell.
Yes, there was and still is a housing bubble. The Fed caused it and an asset bubble in general as well, but Powell tried to lay the blame on regulation. “It’s hard to get zoning, hard to get housing built in sufficient quantity to meet the public’s demand.”
Yeah right, that’s what happens when you blow bubbles, Chairman Powell.
That the market would rally so much on so little suggests Powell has much more work to do to end the speculative behaviors that the Fed ignited.
This post originated at MishTalk.Com.
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Mish
M2 hasn’t changed for c. 1 year. But DDs
have risen. I.e., the composition of M2 has changed. So, the “demand for
money” has fallen, and thus velocity has risen (dis-savings). So, short-term money flows
are rising at the same time long-term money flows are falling. Until short-term
money flows reverse, a recession will not happen. But it’s harder to predict now that Powell has delayed the reporting of the money stock by a month.
market bottomed, I repeated myself 3 times:
(supply shocks) deserve much more blame for the alarming rise in inflation in
1979-1980.” But I disagree. Long-term money flows are down. I wouldn’t trade against them.
Paul Volcker was quoted in the WSJ in 1983 that the Fed: “as
a matter of principle favors payment of interest on all reserve balances” …
“on rounds of equity”. [sic]
This Romulan cloaking device, the payment of interest on
IBDDs, vastly exceeded the level of short-term interest rates which is still
illegal per the FSRRA of 2006. That’s what caused the repo spike in Sept. 2009
(an interest rate inversion). Remember Reg. Q Ceilings that gave nonbanks a 3/4 point interest rate differential?
When you sterilize excess reserve balances, you’re
simultaneously increasing the supply of loan funds, LSAPs on sovereigns, while decreasing
the demand for Treasuries (taking them off the private funding market).
Bank-held savings, frozen savings, destroys the velocity of
circulation (idling more funds). Bank-held
savings have a zero payment’s velocity. The
FDIC raised insurance rates to unlimited for transaction accounts (like the
BOJ), sucking funds out of the nonbanks, inducing nonbank disintermediation.
–Danielle Dimartino Booth’s book: “Fed Up”, pg. 218
“Before the financial crisis, accounts were insured up to
the first $100,000 by the FDIC. That limit kept enormous sums in the shadow
banking system. After the crisis, the FDIC raised the insured account limit to
$250,000. But trillions of dollars still sate outside the traditional banking
system. The “safe” money had no place to go expect money market mutual funds
and government securities, leading to a shortage of T-Bills and a corresponding
drop in yield.”
The
suppression of interest rates (decline in real rates of interest) boosts relative
asset prices. BOE: “QE initially increases the amount of bank
deposits (outside money), those bank-holding companies own (in place of the
assets they sell). Those companies will then wish to rebalance their portfolios
of assets by buying higher-yielding assets, raising the price of those assets
and stimulating spending in the economy.”
commercial bank credit.
And don’t forget, that c. 1
trillion in new bank capital, Basel III requirements, destroyed c. 1 trillion in the money stock.
“. . . whether or not de-globalization and decarbonization will add to inflation?” Powell said he “didn’t know”.
On inflation over here. BT have have just agreed with the Union worker rises of between 6 & 16% depending on grades . Rail workers, Nurses, Postal Workers (might have missed some groups) are striking for inflation rises.