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.”
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“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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