The big news item of the week was the FOMC meeting, and given the outcome was never seriously in doubt (25 bps, another 25bp probably on the way), the Q&A was considered the main event. It did not disappoint. Powell had a few surprises up his sleeve, including the suggestion that financial conditions had tightened a lot over the past year, seemingly ignoring the recent significant loosening under the cover of the argument that “our focus is not on short-term moves but on sustained changes to broader financial conditions”. In response to a question pointing out the recent easing of financial conditions seen in lower bond yields, lower mortgage rates, and resurgent equities, Powell’s comment was dovish enough for markets, which took the opportunity to rally. The speed of the move perhaps tells us something about positioning, but Powell’s pushback against the divergence between the Fed’s projected hikes (plural) and Fed Funds pricing seemed perfunctory rather than stern. (See Gene Wilder as Willy Wonka)
This laid-back approach may seem counter to the previously zealous attitude of central bankers, who were adamant about acting “expeditiously”, but some of Powell’s comments reveal a newfound calm at the Fed. Firstly, on the inflation side, “the inflation data received over the past three months show a welcome reduction in the monthly pace of increases”. Secondly, and perhaps more importantly, the threat of a wage-price spiral, about which Powell noted that “once you see it, you have a serious problem”, appears to be abating. In addition to wage growth having “shown some signs of easing”, Powell asserted that the risk of such a “serious problem” was “becoming less salient”. Inflation cooling? Check. Wage-price spiral avoided? Maybe. Thus, the Fed appears to have no problem giving its tacit approval for the current state of play.
P.S. It is worth noting that across the pond, the BoE’s Andrew Bailey is less sanguine about the current risks and noted, “We’ve got the biggest risk in our forecast on inflation on the upside than we’ve ever had”.
