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The Federal Reserve releases a transcript of Powell’s speech on inflation and the labor market.
Powell highlighted core personal consumption expenditure (PCE) inflation, noting that it is stubbornly high despite the Fed’s rate hikes.
Powell’s key comments (emphasis mine)
Core PCE year-over-year inflation stands at 5.0% in our October estimate, roughly where it stood last December when policy tightening was in its infancy. In 2022, core inflation rose a few tenths above 5% and fell a few tenths below, but mostly moved sideways. So when will inflation go down?
I could answer this question by referring to the inflation forecasts of private sector forecasters or FOMC participants, which overall show a significant decline over the next year. But forecasts have predicted such a drop for more than a year, while inflation has stubbornly moved sideways. The truth is that the path of inflation remains very uncertain.
To begin with, we need to raise interest rates to a level restrictive enough to bring inflation down to 2%. There is considerable uncertainty as to which rate will be sufficient, although there is no doubt that we have made substantial progress, increasing our target range for the fed funds rate by 3.75 percentage points since March.
Despite tighter policy and slower growth over the past year, we have not seen clear progress in slowing inflation.
In the labor market, the demand for workers far outstrips the supply of available workers, and nominal wages have grown at a rate well above what would be consistent with 2% inflation over time. Thus, another condition that we are looking for is the restoration of the balance between supply and demand in the labor market.
Looking back, we can see that a significant and persistent labor shortage has opened up during the pandemic – a shortage that doesn’t seem likely to be fully filled anytime soon.
Many forecasters expected turnout to pick up fairly quickly as the pandemic subsided. And for workers in their early years on the job, this is especially the case. Overall attendance, however, remains well below pre-pandemic trends.
Recent research by Fed economists finds that the participation gap is now driven primarily by excess retirements, that is, retirements in excess of what would have been expected from Aging of the population. These excess retirements could now account for more than 2 million of the 3-1/2 million labor shortage.
So far, the data does not suggest that excess retirements are expected to abate as retirees return to the labor market.
It is likely that restoring price stability will require keeping policy tight for some time. History strongly warns against premature policy easing. We will stay the course until the job is done.
Interview with David Wessel, Director of the Hutchins Center
An interview with Wessel after Powell’s speech was a discussion of job vacancies, supply constraints, wage inflation and whether or not deglobalization and decarbonization will add to inflation.
In response to a question about deglobalization and decarbonization, Powell said he “didn’t know.”
While no one ever really knows such things with 100% certainty, it is hard to conclude that deglobalization and decarbonization will add to inflation.
Powell then said: “Let’s assume that’s true. We still have our 2% inflation targets. We tend to assume that things will go back to how they were, but that doesn’t seem to be happening so far. “
In response to Wessel’s question regarding a soft landing, Powell declined to handicap the odds, stating only that it was plausible. “It’s still doable,” Powell said, adding “if you look at history, it’s not a likely outcome.”
So far the market is still bearish.
There is little or nothing in Powell’s speech and the interview that follows that represents a pivot or even the end of the rate hikes.
Audience Q&A then began at 43:51 in the video above.
Hopium Market
It was the Q&A, not the Powell-prepared speech or the interview that ignited the markets.
In response to a question about risk management, Powell said “A risk management technique is to go slower and grope a bit until we think the right level is. Another is to hold on at a high level longer and not ease the policy too soon.”
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“My colleagues and I don’t want to tighten too much because we don’t want to cut rates quickly. That’s why we’re slowing down, and I’ll try to find our way to what that good level is.”
In response to a question about a shock and awe approach rather than going slower, Powell said “We wouldn’t raise rates and try to crash the economy and then clean up. The right thing to do is to move fast in the rally like we did, and now slow down and get to where we need to be.
Powell does”do not want to get rid of inflation at high human cost.”
The market took off
Powell was not particularly dovish and the odds of a rate hike have already crumbled.
Still, the market was looking for hops and found it in Q&A. The lead chart shows the image.
Admission to the housing bubble
The Q&A then ended with an interesting question about housing and Powell’s answer.
“Coming out of the pandemic, rates were very low, people wanted to buy houses, they wanted to get out of cities and buy houses in the suburbs because of Covid. And so you really had a real estate bubble, … very unsustainable levels and overheating. Now the housing market is going through the other side of that,” Powell said.
Yes, there was and still is a real estate bubble. The Fed caused it and an asset bubble in general as well, but Powell tried to blame it on regulation. “It’s difficult to get zoning, difficult to build enough housing to meet public demand.”
Yeah, that’s what happens when you blow bubbles, President Powell.
The fact that the market is rallying so much on so little suggests that Powell still has a lot of work to do to end the speculative behavior the Fed has unleashed.
This post is from MishTalk.Com.
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