Even with the Fed’s expectations very buoyant, many were still watching some cues from Chair Jay Powell at the latest Fed meeting. For example, he could have said the Fed would rely on data, easing policy if the data had improved. Or that there were signs that inflation is beginning to moderate.
Instead, what he said was that the Fed is determined to keep hiking rates and keep rates high until inflation slides back to 2 percent – which is until 2024 at the earliest, and perhaps until 2025. is not expected to happen. He said, clearly, that the Fed had to moderate inflation despite the economic costs. He said (not explicitly, but indirectly) that the Fed will stay on course, even if we get a recession. And he said the most likely way to reduce inflation was to significantly increase unemployment.
So much for hypocrisy.
There are two ways out of this, and the other is more worrisome. The first is that the Fed is committed to bringing inflation down to target levels, and this is neither surprising nor particularly newsworthy. At least that has been the message since Powell’s Jackson Hole speech. In fact, he started yesterday’s press conference by saying that the message was similar to the one from Jackson Hole.
No, the real surprise from yesterday is simply that the Fed now expects inflation to ease as a multi-year project and it expects a recession along the way, possibly a worse one. Powell frankly said the Fed doesn’t know how bad it will be – expected growth and unemployment numbers are already bad – but it will remain so regardless. What is surprising now is that the Fed expects inflation to last longer and, therefore, interest rates to last longer. It is wrong in the markets to expect a cut sometime next year. And, judging by the figures, it seems that the entire board largely agrees.
So much for hypocrisy.
change of expectations
Surprisingly, the markets are reacting after spending a night to digest it. Yields on the US Treasury 10-year note have risen sharply, taking us to pre-financial crisis levels for the first time since late 2009. Higher rates mean lower stock valuations, and a downtrend in the market. Powell was right, his message was the same as that of Jackson Hole, but even tighter, and the markets are reacting the same way.
Later on, expectations change. The market was going to cut rates next year, but if Powell is right, that’s unlikely. Markets are pricing at a peak rate of around 4.5 percent, but that may not be enough. The future now looks a lot riskier from a monetary policy standpoint than it did 48 hours ago.
increasing economic risk
It also seems risky from an economic point of view. The major bright spot so far has been strong job growth, and the Fed now has it in its sights. Understandably – this is what is driving excess demand that is keeping inflation high – but a bad sign for growth as a whole. And by saying that a recession will not necessarily loosen policy, the Fed has removed a safety net under the economy.
Are things different this time?
So, yesterday’s real message was not dogma – we knew that. The real message was that the Fed is now only looking at inflation as its mandate. Jobs, economic growth and markets may and will all have to be sacrificed to bring inflation under control. Greenspan / Bernanke / Yellen Putt is dead, and we’re back in the future with Paul Volcker policies.
It will take some time to get used to it, and Powell and Board may not be able to keep up. But for the time being, this time things are looking really different.
Credit: www.forbes.com /