“Supply side will take a little bit of time to adapt”
While the FOMC left both rates and its asset purchases unchanged, rolling along with a “business as usual” feel, the post-meeting press conference took on a different tone. Yes, there was some of the usual obsequiousness and questions about whether Powell was going to visit the homeless camped out near the Eccles building. But there were also some unusually pointed questions regarding a number of themes we’ve covered in these pages.
The first theme that saw significant pushback was that of inflation. Naming Larry Summers and company, who “think the Fed might be, might let things get out of hand with the new policy stance”, one reporter asked “what is different this time” versus previous inflationary periods. Clearly anticipating this question, Powell took to his notes, citing base effects and bottlenecks as the sources of “upward pressure on prices”, but assured the audience that the Fed was “prepared to use our tools”. Powell did however admit that the Fed wasn’t sure how long “it will take to resolve the bottlenecks” in the economy amid demand “spurred with fiscal transfers” (here’s looking at you, Personal Income).
There was also pushback on housing. Responding to a question about potential for a housing bubble, Powell noted that “there’s clearly strong demand” and “just not a lot of supply right now”, arguing that the housing market lacked some of the tell-tale signs of a bubble, such as “low doc no doc lending practices”. Powell was, however, then met with a follow-up question on MBS, with one reporter asking if the Fed’s purchases were “playing a role at all in pushing up prices”.
Finally, while not quite a pushback on Fed’s policies, the dynamics underlying the labor market were brought into question. In regard to the tension between “a high level of unemployment “ and “an elevated number of companies saying that they can’t find workers”, Powell pointed to broad mismatch, whether skill-based or geographic. He did however also hint at the idea that unemployment insurance benefits are altering employment dynamics, noting that “benefits will run out in September” and believing that the job market will come back to “equilibrium between labor supply and labor demand. It may take some months though”. It is probably best to file the latter point in the “time will tell” category because, while the difference between hopes and reality looms large in legislation, there are a number of bills in Congress and plans proposed by the Biden administration that could upset the course to equilibrium.
