FOMC commentary – june 12, 2024

Chairman Powell has a problem.

He won’t forecast.

He is prepared to act on interest rates more quickly “if the labor markets deteriorate unexpectedly” while at the same time acknowledging that if he waits to see that, it’s likely to be too late (monetary policy has an approximately 12-month lagged effect.)

He has consistently signaled that the Fed does not consider wage inflation to be a significant contributor to the overall trajectory of inflation. But wage increases “might be a little too high.”

He says that the Fed is surprised that the slowdown in housing rents has taken so long to show up in the inflation numbers and that it might take “several years.” At the same time, he states that the US measurement of “housing services” (rents, imputed rental cost to owner-occupied homes) has been done differently than in other countries for a long time and is a well-understood metric.

He observes that import prices have gone up and that this “doesn’t make a lot of sense [especially given the stronger dollar], So that’s a problem.”

He acknowledges that the Fed has a confidence problem, specifically not adequate confidence in where the inflation numbers are headed in order to cut rates. Yet he cannot say from whence that confidence problem comes and what, exactly, would cure it. (NB: there is a long-time seasonal bias in first-quarter inflation numbers. For almost two decades, the first quarter inflation numbers are the highest of any given year. Economists and analysts know this. Presumably, the Fed does as well.)

He is either supremely confident in his “wait and see stance” or extraordinarily uncertain about the data that drives his analysis—or both.

He has probably handed the policy-making reins to the hawks on the Board of Governors, at least for the moment.

The one-rate-cut-this-year scenario embodied in the Summary of Economic Projections (SEP) that accompanied the FOMC interest rate press release is well within the scope of what was laid out by the European Central Bank (ECB) last Thursday. ECB President Christine LaGarde made very clear that the ECB’s rate cut might very well be the only one this year, or, at minimum, one should not factor in an immediate follow-on rate cut. The SEP numbers and Powell’s press conference commentary could be understood as consistent with this ECB viewpoint: one rate cut sometime this year and not necessarily the beginning of a trend. Furthermore, like the ECB, the SEP signals that the long-term outlook for interest rates will be less high for longer and higher than rates experienced in the second decade of this century. Yet the contrast between the two central bankers can not be sharper. President LaGarde clearly stated the purpose of the ECB rate cut and shone a light on the longer-term forecast for the Euro Area economies, while Chairman Powell seemingly waffled today on just about every astute question asked by the financial press.

Over the last few years, there have been many justifiable worries about a “Fed mistake.”  Recently, worries have mounted that the Federal Reserve would make an inflation mistake, loosening monetary policy too soon, only to have inflation rebound. This latter fear was especially apparent during the first quarter of 2024, despite the above-mentioned seasonal issues that appear to have pushed the inflation numbers for January, February, and March in the wrong direction. Now, however, the Fed’s mistake of concern may be keeping interest rates too high for too long, failing to understand the lags in policy and eventually triggering an undesired and temporarily unresolvable economic slowdown. Where we go from here is now open to much greater question than many would have once thought.