Fed Signals Higher-for-Longer Rates With Hikes Almost Finished Powell stresses ‘careful’ approach in Wednesday press briefing
Federal Reserve Chair Jerome Powell made clear Wednesday the central bank is close to done raising interest rates, but his colleagues delivered the message that resonated: Borrowing costs must remain higher for longer amid renewed strength in the economy.
After a series of rapid rate hikes over the past 18 months, the Fed can now “proceed carefully,” Powell said — a sentiment he repeated at least a dozen times Wednesday during a press conference that followed the central bank’s decision to leave rates unchanged.
In quarterly economic projections released following a two-day policy meeting, 12 of 19 Fed officials said they still expect to raise rates once more this year. The bigger takeaway for investors was the revelation that policymakers see fewer rate cuts than previously anticipated in 2024, in part due to a stronger labor market.
The projections also showed they expect inflation to fall below 3% next year, and return to their 2% target by 2026. In other words, the “soft landing” for the US economy that looked more remote three months ago now seems within reach.
“They’re basically saying that a soft landing scenario is going to be met with tighter policy,” said Brett Ryan, a senior US economist at Deutsche Bank AG. “That was the main takeaway.” (…)
Fed officials now expect their benchmark rate to be at 5.1% by the end of next year, according to their median estimate, up from 4.6% in the last projection round in June.
During the press conference, Powell stressed that policymakers are facing a high amount of uncertainty, and seemed determined not to give markets any reason to rally. (…)
Futures show roughly even odds of more tightening in 2023. (…)
The FOMC meets Oct. 31-Nov. 1 and again in December.
The WSJ’s Nick Timiraos:
“Really, what people are saying is, ‘Let’s see how the data come in,’” [Powell] said at a news conference Wednesday. “They want to be convinced. They want to be careful not to jump to a conclusion.” (…)
“The fact that we’ve come this far lets us really proceed carefully,” said Powell. He used those words—“proceed carefully”—six times during Wednesday’s news conference, a sign of heightened caution about lifting rates. (…)
“They’re worried about taking a victory lap too early, obviously, but these forecasts are soft landing-adjacent,” said Jan Hatzius, chief economist at Goldman Sachs. He doesn’t think the Fed will raise rates again because he thinks inflation is likely to decline more in the coming months than officials projected Wednesday.
Fed officials’ projection for annual core inflation, which excludes volatile food and energy prices, edged down to 3.7% for the fourth quarter. They see it falling to 2.6% next year. The Fed targets 2% inflation on average.
Media and pundits have their own narratives but let’s hear it from the horse’s mouth to better read his mind (my emphasis):
- Clearly, we are just—what we’ve 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.
- But what it reflects, though, is that economic activity has been stronger than we expected; stronger than I think everyone expected.
- And really, what people are saying is let’s see how the data come in. We want to see that this—these good inflation readings that we’ve been seeing for the last three months, we want to see that it’s more than just three months, right? We want to see—you know, the labor market report that we received, the last one that we received, was a good example of what we do—what we do want to see. It was a combination of—you know, of across a broad range of indicators continuing rebalancing of the labor market. So those are the two things that—those are our two mandate variables, and that’s the progress that we want to see.
- Now, we’re fairly close, we think, to where we need to get. It’s just a question of reaching the right stance. Nonetheless, you know, we need—we need to get to a place where we’re confident that we have a stance that will bring inflation down to 2 percent over time. That’s where we need to get to.
- But I think broadly, stronger economic activity means rates—we have to do more with rates. And that’s what that that’s what that—that’s what that meeting is telling you.
- It is certainly possible that—you know, that the neutral rate at this moment is higher than that. And that’s part of the explanation for why the economy has been more resilient than expected.
- And I think confidence comes from seeing, you know, enough data that you feel like, yes, OK, this feels like we can—we can, for now, decide that this is the right level and just agree to stay here. And then the question is how long do you stay at that level, and that’s a whole nother set of questions. For now the question is trying to find that level where we think we can stay there. And we haven’t—we haven’t gotten to a point of confidence about that yet. That’s what we’re—that’s the stage we’re at, though.
- So I think the question will be—GDP is not a mandate, right. Maximum employment and price stability are the mandates. The question will be is the—is GDP—is the heat that we see in GDP, is it really a threat to our ability to get back to 2 percent inflation? That’s going to be the question. It’s not a question about GDP on its own. It’s, you know, you’re expecting to see this improvement—you know, continued rebalancing in the labor market and inflation moving back down to 2 percent in a sustainable way. We have to have confidence in that. And, you know, we’d be looking at GDP just to the extent that it threatens one or both of those.
- 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 go through—you can have a long period where the economy is just very uncertain. And it’ll affect growth. It’ll 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.
- what’s happened is growth has come in stronger, right—stronger than expected and that’s required higher rates.
- In terms of inflation, you are seeing—the last three readings are very good readings. It’s only three readings. You know, we were well aware that we need to see more than three readings. But if you look at June, July, and August you’re looking at, you know, really significant declines in core inflation, largely in the goods sector, also to some extent in housing services and just a little in non-housing services. Those are the three buckets.
- 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.
- So what—I guess it’s fair to say that the economy has been stronger than many expected, given what’s been happening with interest rates. Why is that? Many candidate explanations. One is just that household balance sheets and business balance sheets have been stronger than we had understood, and so that spending has held up and that kind of thing. We’re not sure about that. The savings rate for consumers has come down a lot. The question is whether that’s sustainable. That could be—it could just mean that the data effect is later. It could also be that for other reasons the neutral rate of interest is higher, for various reasons. We don’t know that. It could also just be that policy hasn’t been restrictive enough for long enough. And there are many candidate explanations. We have to, in all this uncertainty, make policy. And, you know, I feel like what we have right now is what’s still a very strong labor market but that’s coming back into balance. We’re making progress on inflation. Growth, by many forecasts—many, many forecasts call for growth to moderate over the course of the next year. So that’s where we are. And, you know, we have to—we have to deal with what comes.
So:
- Powell and co., certainly Powell, remain totally focused on inflation and wages.
- Inflation came in better than expected but they need more than 3 months of good data.
- The economy is not part of their mandate…but, recently, “growth came in stronger than expected and that’s required higher rates.
- And, looking ahead, “if the economy comes in stronger than expected, that just means we’ll have to do more in terms of monetary policy.”
- Why stronger than expected? “We don’t know that.”
With a government shutdown looming, no new data to convince them one way or the other, poor man!
The Fed has doubled its estimate for economic growth this year, while upgrading 2024 to 1.5% from 1.1%. That would explain why its projections for the fed funds rate have risen by 50 basis points for both 2024 and 2025.
What’s strange is that the FOMC has also grown far more optimistic about unemployment, cutting its estimate for the jobless rate in both the next two years to 4.1% from 4.5%. On the face of it, that sounds contradictory; TS Lombard’s Steven Blitz dubbed it a belief in “immaculate disinflation.”
UAW Negotiator Says New Stellantis Offer Doesn’t Look Good UAW workers at a Mercedes parts plant declared their own strike.
Stellantis NV’s new contract offer to the United Auto Workers lacks the job security guarantees the union wants, a negotiator said, suggesting workers will reject it days before a deadline to expand their historic strike.
UAW President Shawn Fain has yet to announce whether he’ll green light the latest Stellantis offer, but the proposal had a similar pay increase to the 19.5% already offered. Additionally, it doesn’t give workers the clear vision of the future they’re seeking, said Scott Moldenhauer, a negotiator for the union. (…)
General Motors Co. isn’t having an easy time finding a deal, either. GM Chief Executive Officer Mary Barra told the automaker’s salaried staff Wednesday morning that the union’s salary demands were too costly. The company’s current offer would raise average yearly compensation to $150,000 a year with benefits, according to people familiar with the matter. And while GM continued bargaining, the people said the two sides were far apart.
The labor actions spread beyond Detroit for the first time as 190 UAW workers struck a ZF plant in Tuscaloosa, Alabama, that supplies front axles for Mercedes-Benz Group AG vehicles. While the UAW represents part supplier plants, these locals make their own decisions about job actions and have contracts that differ from the ones governing Detroit’s autoworkers. But the local is striking over some of the same issues, such as equal pay for all workers in the same plant. (…)
But on Tuesday, Stellantis’ North American Chief Operating Officer Mark Stewart told CNBC that his company has inventory on hand to offset the strike’s impact. Cox Automotive reported that the auto companies turned out cars at a fast clip ahead of the strike, leaving them with the highest inventory level since April 2021. (…)
Memo for Mr. Powell’s better understanding: during the last 5 months, monthly production of Motor Vehicles and Parts was 7.8% higher, on average, than during the first 3 months of the year. Related employment was up 4.6% YoY in August.
Bank of America (BAC.N) will boost its minimum hourly wage to $23 in October as it heads toward a goal of raising hourly pay to $25 by 2025, the company said in a statement Wednesday.
The pay bump translates to a minimum salary of almost $48,000 a year for full-time employees, according to the second largest U.S. lender.
BofA has increased pay several times in recent years, starting with a move to $15 an hour in 2017.
Xi’s Purge of Handpicked Ministers Shatters Stability Image Chinese leader has ousted top officials with no explanation
After President Xi Jinping tore up the Communist Party rulebook to promote key loyalists last year, some observers expected his new team to operate more smoothly in tackling China’s biggest challenges.
Instead, his government looks like it’s in disarray. Xi’s mysterious purge of his foreign minister in July, followed by the reported ouster of his defense chief less than two months later, is making China appear unstable to the outside world. The Chinese leader also overhauled the generals overseeing China’s Rocket Force, which manages the nation’s nuclear arsenal, without giving an explanation.
And those are just the firings that have been made public. (…)
China hasn’t seen such an intense period of high-profile purges since the reform era of the 1980s, exposing the “opacity and brutality” of Xi’s system, according to Richard McGregor, a senior fellow at the Lowy Institute in Sydney who wrote The Party: The Secret World of China’s Communist Rulers.
“These men were handpicked by Xi himself for promotion,” McGregor said. “So their fall reflects on him.” (…)
As Xi’s mistrust of his officials grows, the system is showing signs of becoming paralyzed as he tries to micromanage domestic operations. One foreign executive in Beijing, who asked not to be identified, said Chinese officials now operate in “silos of fear,” with everyone scared of Xi and also isolated from each other. (…)