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 27-page transcript taken on 20th September, 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. Price stability is the responsibility of the Federal Reserve. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all.
· We have covered a lot of ground, and the full effects of our tightening have yet to be felt.
· Our decisions will be based on our ongoing assessments of the incoming data and the evolving outlook and risks.
· Inflation remains well above our longer-run goal of 2 percent. Inflation has moderated somewhat since the middle of last year, and longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets. Nevertheless, the process of getting inflation sustainably down to 2 percent has a long way to go.
· The Fed’s monetary policy actions are guided by our mandate to promote maximum employment and stable prices for the American people. My colleagues and I are acutely aware that high inflation imposes significant hardship as it erodes purchasing power, especially for those least able to meet the higher costs of essentials like food, housing, and transportation. We are highly attentive to the risks that high inflation poses to both sides of our mandate, and we are strongly committed to returning inflation to our 2 percent objective.
· If the economy evolves as projected, the median participant projects that the appropriate level of the federal funds rate will be 5.6 percent at the end of this year, 5.1 percent at the end of 2024, and 3.9 percent at the end of 2025. These projections, of course, are not a Committee decision or plan; if the economy does not evolve as projected, the path for policy will adjust as appropriate to foster our maximum employment and price stability goals.
· We are prepared to raise rates further if appropriate, and we intend to hold policy at a restrictive level until we are confident that inflation is moving down sustainably toward our objective.
Some Q&A highlight:
On Energy Price -
Energy prices are very important for the consumer. This can affect consumer spending. It certainly can affect consumer sentiment. I mean, gas prices are one of the big things that affects consumer sentiment. It really comes down to how persistent, how sustained these energy prices are. The reason why we look at core inflation, which excludes food and energy, is that energy goes up and down like that. And energy prices mostly don't contain much of a signal about how tight the economy is, and hence don't tell you much about where inflation is really going. However, we're well aware, though, that, you know, if energy prices increase and stay high, that will have an effect on spending. And it may have an effect on consumer expectations of inflation, things like that. That's just things we have to monitor.
On Treasury Inverted Yield Curve -
Treasury curve - You know, rates have moved up significantly. I think it's always hard to say precisely, but most people do a common decomposition of the increase, and the view will be it's not mostly about inflation expectations. It's mostly about other things, you know, either term premium or real yields, and it's hard to be precise about this. Of course, everyone's got models that will give you a very precise answer, but they give you different answers. But essentially, they're moving up. It's not because of inflation. It's because probably it will probably have something to do with stronger growth, I would say more supply of Treasuries. You know, the common explanations that you hear in the markets kind of make sense.
It's a good thing that the economy is strong. It's a good thing that the economy has been able to hold up under the tightening that we've done. It's a good thing that the labor market is strong. The only concern -- it just means this. If the economy comes in stronger than expected, that just means we'll have to do more in terms of monetary policy to get back to 2 percent, because we will get back to 2 percent.
Inflation affects the rich and not so rich -
The people who are most hurt by inflation are the people who are on a fixed income. If you're a person who spends all of your income, you don't really have any meaningful savings. You spend all your income on the basics of life, clothing, food, transportation, heating, the basics, and prices go up by 5 percent, 6 percent, 7 percent, you're in trouble right away, whereas even middle class people have some savings and some ability to absorb that. So it is for those people as much as for anybody that we need to restore price stability, and we want to do it as quickly as possible.
Other questions:
If you look at the SEP, as you obviously will have done, you will see that the majority of participants believe that it is more likely than not that it will be appropriate for us to raise rates one more time in the two remaining meetings this year.
Clearly what we decided to do is maintain the policy rate and await further data. We want to see convincing evidence, really, that we have reached the appropriate level, and we're seeing progress, and we welcome that. But we need to see more progress before we'll be willing to reach that conclusion.
For now, the question is trying to find that level where we think we can stay there. And we haven't gotten to a point of confidence about that yet. That's the stage we're at, though.
The decision that we make, you know, at each meeting and certainly at the last two meetings this year, it's going to depend on the totality of all the data. So the inflation data, the labor market data, the growth data, the balance of risks and the other events that are happening out there.
The real point, though, is the worst thing we can do is to fail to restore price stability, because the record is clear on that. If you don't restore price stability, inflation comes back, and you can have a long period where the economy is just very uncertain and it will affect growth, it will affect all kinds of things. It can be a miserable period to have inflation constantly coming back and the Fed coming in and having to tighten again and again. So the best thing we can do for everyone, we believe, is to restore price stability. I think now, today, we actually have the ability to be careful at this point and move carefully, and that's what we're planning to do. So, we fully appreciate the benefits of being able to continue what we see already, which is rebalancing in the labor market and inflation coming down without seeing an important large increase in unemployment, which has been typical of other tightening cycles.
We have come very far very fast in the rate increases that we've made. And I think it was important at the beginning that we move quickly, and we did. And I think as we get closer to the rate that we think, the stance of monetary policy that we think is appropriate to bring inflation down to 2 percent over time, you know, the risks become more two-sided. And the risk of over-tightening and the risk of under-tightening becomes more equal. And I think the natural, common-sense thing to do is as you approach that, you move a little more slowly as you get closer to it. And that's what we're doing. So we're taking advantage of the fact that we have moved quickly to move a little more carefully now as we sort of find our way to the right level of restriction that we need to get inflation back down to 2 percent.