“That’s at least the plan”
Though there’s that saying about “the best-laid plans of mice and men”, if Jerome Powell’s comments following the latest FOMC meeting are any indication, Fed policy and economic developments are currently going to plan. While the chairman was somewhat strained in answering some pointed questions, including one about the trading activity of Fed members, he was generally optimistic. Talking of financial conditions, Powell argued that “our communication channel with the market is working… Markets are now pricing in several rate increases. Surveys show that market participants expect a balance sheet runoff to begin… at the appropriate time. Even the specter of QT isn’t ruffling the Fed’s feathers as the Fed is expected to decide “a timing and a pace and composition and all those things and then announce that with advance notice, and it will start in the background”. As Powell explained, the balance sheet is in the background because “the active tool meeting to meeting is not — both of them, it’s the federal funds rate”. What’s more, “there’s also an element of uncertainty around the balance sheet”. Why worry? (Hint to the Fed: see the postscript here)
“Expecting Heartache?“
So, if, according to Powell, market expectations are in line with Fed hikes and balance sheet runoff, what’s not to love? Unfortunately, as Powell admitted, “the one risk [to a soft landing] is that inflation risks are still to the upside… There’s a risk that the high inflation we’re seeing will be prolonged, and there’s a risk that it will move even higher.” (A wink in preparation for tomorrow’s PCE release?). It’s here that the (misattributed) saying “Expectation is the root of all heartache” comes into the play, with the heartache being the Fed’s and the “expectations” being those of… nearly everyone else. Building on the Philly and Empire Fed price expectations data from last week, this week’s Richmond and Kansas City Fed surveys saw record readings for their expectations for Prices Received. One Kansas City respondent even admitted to intentionally trying to create demand destruction: “Purchasing, costs, supply chain are still massive issues… have basically started raising prices on select items to almost extreme levels to intentionally limit or eliminate demand.” Consumers also continue to expect hefty inflation, with the Conference Board’s reading of year ahead expectations sitting at 6.8% as “concerns about inflation declined for the second straight month, but remain elevated”.
P.S. Mohamed El-Erian argues in a recent article that even when the Fed delivers “what is expected”, it may not be what is needed.
P.P.S. A new supply chain hurdle, aging time?
