By Wong Kon How
One of the most important conferences or seminars we should attend is the press conference after each FOMC meeting. The reporters will have their translations, but I prefer to hear from Jerome Powell himself, as it provides information on what the Fed is thinking.
It is a 26-page transcript, and I have highlighted some of his key statements.
Fed’s Chairman speech highlight:
· My colleagues and I remain squarely focused on our dual mandate to promote maximum employment and stable prices for the American people. We understand the hardship that high inflation is causing, and we remain strongly committed to bringing inflation back down to our 2 percent goal.
· Today, we decided to leave our policy interest rate unchanged and to continue to reduce our securities holdings.
· We will make decisions about the extent of additional policy firming and how long policy will remain restrictive based on the totality of the incoming data, the evolving outlook, and the balance of risks.
· But a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal. The process of getting inflation sustainably down to 2 percent has a long way to go.
· we have raised our policy rate by 5-1/4 percentage points, and we have decreased our securities holdings by more than $1 trillion.
· Evidence of growth persistently above potential, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy.
the rise in long-term bond yields, to what degree is that the planned action by the Fed at this meeting?
As for the Committee, we are committed to achieving a stance of monetary policy that's sufficiently restrictive to bring inflation down to 2 percent over time. And we're not confident yet that we have achieved such a stance.
As I mentioned, persistent changes in broader financial conditions can have implications for the path of monetary policy. In this case, the tighter financial conditions we're seeing from higher long-term rates but also from other sources like the stronger dollar and lower equity prices could matter for future rate decisions, as long as two conditions are satisfied. The first is that the tighter conditions would need to be persistent and that is something that remains to be seen. But that's critical, things are fluctuating back and forth, that's not what we're looking for. With financial conditions, we're looking for persistent changes that are material. The second thing is that the longer-term rates that have moved up, they can't simply be a reflection of expected policy moves from us that we would then, that if we didn't follow through on them, then the rates would come back down. So, and I would say on that, it does not appear that an expectation of higher near-term policy rates is causing the increase in longer-term rates. So, in the meantime though, perhaps the most important thing is that these higher Treasury yields are showing through a higher borrowing cost for households and businesses and those higher costs are going to weigh on economic activity to the extent this tightening persists and the mind's eye goes to the 8 percent, near 8 percent mortgage rate, which could have pretty significant effect on housing.
How much does this tightening and financial conditions substitute for rate hikes if the tightening is persistent. You had said it was worth maybe a quarter point when we had the bank failures in the spring. What is it here on something that's presumably more straightforward and more familiar to simulate?
In terms of how to think about translation into rate hikes, I think it's just too early to be doing that, and the main reason is we just don't know how persistent this will be. You can see how volatile it is, different kinds of news will affect the level of rates and I think any kind of an estimate that was precise would hang out there and have a great chance of looking wrong very quickly.
What then is the potential impact on the trajectory of rate cuts?
The Committee is not thinking about rate cuts right now at all. We're not talking about rate cuts, we're still very focused on the first question, which is; have we achieved a stance of monetary policy that's sufficiently restrictive to bring inflation down to 2 percent over time, sustainably? That is the question we're focusing on.
The next question, as you know, will be for how long will we remain restrictive? Will policy remain restrictive and what we've said there is that we'll keep policy restrictive until we're confident that inflation is on a sustainable path down to 2 percent. That'll be the next question, but honestly, right now we're really tightly focused on the first question. The question of rate cuts just doesn't come up because I think the first, it's so important to get that first question as close to right as you can.
When you look at long-term treasury yields, what else are you watching to evaluate how those tighter financial conditions are hitting the economy and if it will lessen the need for further tightening?
A few of the common ones that people look at. And so they're looking at things like the level of the dollar, level of equity prices, the level of rates, the credit spreads, sometimes they're pulling in credit availability, and things like that, so it isn't any one thing. We would never look at for example, long-term treasury rates in isolation. Nor would we ignore them. But we would look at them as part of a broader picture and they do play a role of course, in many of the major standard financial condition indexes.
You talked about how the banking system is resilient, of course part of resilience the past year stems from the bank term funding program that you launched in March. Given that bond prices have not recovered, that unrealized losses are probably mounting, how likely is it that you might have to extend that program in March next year?
Good question, we haven't really, we haven't really been thinking about that yet. We, it's November 1, and that's a decision we'll be making in the first quarter of next year.