Powell presser shows no assurance of any rate hike pause in 2022

calendar 03/08/2022 - 21:15 UTC

Wall Street, Gold jumped, while USD slips on a less hawkish Fed hike. As highly expected, on the 27th of July, Fed hiked +0.75% and indicated further hikes @+0.50% or +0.75% in September, depending on inflation and labor market data. But Powell also indicated smaller hikes (depending on data) in November and December. Overall, Powell was quite confident about a softish landing despite faster Fed tightening.

After FOMC +75 bps rate hikes on Thursday, Fed funds rate futures forecast another 100 bps rate hike by Dec’22; i.e. 3.50% terminal rate, which is less than earlier projections of +4.00%. Subsequently, risk assets such as Dow, Nasdaq, S&P, Gold, and silver jumped, while the USD stumbled on hopes of a ‘Powell Put/Pause’.

Highlights/relevant transcript of Fed Chair Powell’s Q&A session: Post Fed meeting 27th July

·         Fed is open-minded to a bigger 100 bps hike if inflation data requires so; but in July, Fed hiked +75 bps as it’s appropriate with June CPI data; the Fed’s July hike of +75 bps is also in line with June forward guidance and has broad FOMC support



“So, we did judge that a 75-basis point increase was the right magnitude in light of the data in the context of the ongoing increases in the policy rate that we've been making. I'd say that we wouldn't hesitate to make an even larger move than we did today if the Committee were to conclude that that was appropriate. That was not the case at this meeting. There was very broad support for the move that we made. You mentioned the June meeting. We had said many times that we were prepared to move more aggressively if inflation continued to disappoint. And that's why we did move to a more aggressive pace at the June meeting as we said we would do. At this meeting, we continued at that more aggressive pace as inflation has continued to disappoint in the form of the June CPI rating.”


·         After the July hike of +0.75%, the Fed rate is now at 2.50%, which is a neutral zone (as per Fed) and going forward Fed will keep the rate at a moderately restrictive zone to control inflation


·         Fed will continue to hike in coming meetings but will decide the quantum of hike meeting-by-meeting depending on incoming economic data


“So, I guess I'd start by saying we've been saying we would move expeditiously to get to the range of neutral. And I think we've done that now. We're at 2.25 to 2.5 and that's right in the range of what we think is neutral. So, the question is how are we thinking about the path forward-- So, one thing that hasn't changed-- won't change is that our focus is going to continue to be using our tools to bring demand back into better balance with supply in order to bring inflation back down. That will continue to be our overarching focus. We also said that we expect ongoing rate hikes will be appropriate. And that we'll make decisions meeting by meeting.”

·         Fed will continue to look into incoming economic data to judge whether existing hikes are causing sufficient speed barker for the economic activity, labor market, and demand is falling adequately to match existing supply; until Fed is satisfied with slowing demand, it will continue to hike appropriately


“So, what are we going to be looking at? We'll be looking at the incoming data as I mentioned, and that'll start with economic activity. Are we seeing the slowdown that we—the slowdown in economic activity that we think we need? And there's some evidence that we are at this time. Of course, we'll be looking at labor market conditions. And we'll be asking whether we see the alignment between supply and demand getting better, getting closer.”

·         Although the official mandate is to manage headline inflation, as a better/less volatile indicator/measurement, Fed usually considers core. But this time Fed will focus on both and rather than simple inflation reading, Fed will also judge the inflation outlook going forward


“Of course, we'll be looking closely at inflation. You mentioned headline and core. Our mandate is for headline, of course, it's not for the core. But we look at the core because the core is actually a better indicator of the headline. And of all inflation going forward. So, we'll be looking at both. And we'll be looking at those both really for what they're saying for the outlook rather than just simply for what they say.”

·         Fed will also judge whether existing and likely future hikes will be sufficient restrictive so that inflation will come back to the 2% target

“But we'll be asking. Do we see inflationary pressures declining? Do we see actual readings of inflation coming down? So in light of all that data, the question we'll be asking is whether the stance of policy we have is sufficiently restrictive to bring inflation back down to our 2 percent target. And it's also worth noting that these rate hikes have been large and they've come quickly. And, likely, their full effect has not been felt by the economy.”

·         Fed will go for additional tightening into the restrictive zone to around 3.50% in line with its June projections (SEP)

“So, there's probably some additional tightening, significant additional tightening in the pipeline. So where are we going with this? I think the best-- And maybe the best data point for that would be what we wrote down in our SEP at the June meeting, so I think the median for the end of this year, the median would have been between 3 and a quarter and 3 and a half.”

·         As per June FOMC dot-plots (SEP), Fed may hike further by +50 bps in 2023; but Fed will also review the June dot-plot in September

“And then people wrote down 50 basis points higher than that for 2023. So that's-- even though that's now six weeks old, I guess, that's the most recent reading. Of course, we'll update that reading at the September meeting in eight weeks. So that's how we're thinking about it.”

·         Fed may go for another unusually large hike in September too, but that’s a decision, FOMC will take depending on actual data (mainly inflation) between now (27th July) and 21st September (the next FOMC policy date); thus Fed may go for +0.75% rate hike also in September, but this must not be taken as a clear forward guidance

“As I mentioned, as it relates to September, I said that another unusually large increase could be appropriate, but that's not a decision we're making now. It's one that we'll make based on the data we see. And we're going to be making decisions meeting by meeting. We think it's time to just go to a meeting by meeting basis and not provide the kind of clear guidance that we had provided on the weighted neutral.”

·         Fed’s June dot-plot shows -0.50% rate cuts in 2024 after showing +4.00% terminal rate till Dec’23; Powell was asked whether such expectations of the financial market are consistent with Fed’s approach to lower inflation expectations; Powell downplayed the significance of any longer-term Fed dot-plots beyond 6-12 months even in normal times and especially in abnormal/turbulent times like COVID or war (Russia-Ukraine)


“So, I'm going to start by pointing out that it's very hard to say with any confidence in normal times - in normal times - what the economy's going to be doing in six or 12 months. And to try to predict what the appropriate monetary policy would respond—of course, we do that in the SEP, but nonetheless, you've got to take any estimates of what rates will be next year with a grain of salt. Because there's so much uncertainty-- These are not normal times. There's significantly more uncertainty now about the path ahead than I think there ordinarily is, and ordinarily it's quite high.”

·         As per June dot-plots, Fed may hike another +50 bps in 2023, but Fed will review the same in September sot-plots


“So, again, I would-- the best data, the only data point I have for you really is the June SEP, Which I think is just the most recent thing the Committee's done. Since then, inflation has come in higher; economic activity has come in weaker than expected. But at the same time, I would say that's probably the best estimate of where the Committee's thinking is still. This is that we would get to a moderately restrictive level by the

end of this year, by which I mean summer between 3 and 3 and a half percent, and that is when the Committee sees further rate increases in 2023. As I mentioned, we'll update that of course at the September meeting. But that's the best I can do on that.”

·         Fed will look at almost 8-weeks of economic data between July and September meetings, which includes two CPI readings, two labor market data, and lots of others about general economic activities, Fed will also look at any possible new development in the Russia-Ukraine geopolitical event (war) and will take the final decision about Dec’22 terminal rate in September dot-plots


“So, I wouldn't say it (June CPI) was-- I think we didn't expect a good reading, but this one was even worse than expected, I would say. I don't talk about my own personal estimate of what the terminal rate would be. I will write down that in-- it's going to evolve. Obviously, it has evolved over the course-- I think for all participants, it has evolved over the course of the year.


As we learn how persistent inflation's going to be. And by the time of the September meeting, we will have seen two more CPI readings and two more labor market readings. And a significant amount of readings about economic activity and perhaps geopolitical developments, who knows. It'll be a lot-- it's an eight-week intermeeting period. So I think we'll see quite a lot of data. And we'll make our decision at that meeting-- Based on that data.”

·         Looking ahead, Fed will focus both on headline and core inflation (amid declining oil) to judge the inflation outlook and whether Fed’s concurrent restrictive rate zones are enough to push it further down to 2% over the medium  term


“So, it's hard to deal with hypotheticals. But I just would say this. We would look at both and we'd be asking ourselves are we confident that inflation is on a path down to 2 percent? That's the question. And we'll be making-- our policy stance will be set at a level, ultimately, at which we are confident that inflation is going to be moving down to 2 percent. So, it would depend on a lot of things. Of course, as I mentioned, core inflation is a better predictor of inflation going forward, headline inflation tends to be volatile. So, in ordinary times, you look through volatile moves in commodities.”

·         Fed’s policy tools are largely ineffective in addressing lingering supply shocks, but Fed will also consider sticky inflation expectations because of such lingering supply shocks amid Russia-Ukraine/NATO war/proxy war


“The problem with the current situation is that if you have a sustained period of supply shocks, those can actually start to undermine or to work on de-anchoring inflation expectations. The public doesn't distinguish between core and headline inflation in their thinking. So it's something we have to take into consideration in our policy making even though our tools don't work on some aspects of this, which are the supply side issues.”

·         Fed thinks some economic slowdown is necessary to bring demand down, so the existing supply capacity of the economy can catch up with demand, resulting in lower inflation back to the 2% target


“So, as I mentioned, we think it's necessary to have growth slowdown. And growth is going to be slowing down this year for a couple of reasons. One of which is that you're coming off of the very high growth of the reopening year of 2021. You're also seeing tighter monetary policy. And you should see some slowing. We think we need a period of growth below potential, to create some slack so that the supply side can catch up. We also think that there will be, in all likelihood, some softening in labor market conditions. And those are things that we expect, and we think that they're probably necessary if we were to have-- to get inflation. If we were to be able to get inflation back down on the path to 2 percent and ultimately get there.”

·         Fed will now focus more on inflation management rather than economic growth; Fed thinks without price stability, sustainable economic growth/strong labor market is not possible; Fed vows to back to the days of the Goldilocks economy (not too cold, not too hot)


“So, we're going to be-- again, we're going to be focused on getting inflation back down. And we-- as I've said on other occasions, price stability is really the bedrock of the economy. And nothing works in the

economy without price stability. We can't have a strong labor market without price stability for an extended period. We all want to get back to the kind of labor market we had before the pandemic where differences between racial and gender differences and that kind of thing were at historic minimums, where participation was high, where inflation was low. We want to get back to that. But that's not happening. That's not going to happen without restoring price stability. So, that's something we see as something that we simply must do. And we think that we don't see it as a trade-off with the employment mandate. We see it as a way to facilitate the sustained achievement of the employer mandate in the longer term.”

·         Fed is not seeking an all-out recession, but calibrated slowing down of the economy/labor market to bring inflation down; Fed wants a softish landing to ensure Goldilocks economy with sustainable price stability and labor market


“So, we're trying to do just the right amount, right? We're not trying to have a recession. And we don't think we have to. We think there's a path for us to be able to bring inflation down while sustaining a strong labor market. As I mentioned – along with --in all likelihood, some softening in labor market conditions. So that is-- that's what we're trying to achieve, and we continue to think that there's a path to that. We know that the path has narrowed, really based on events that are outside of our control. And it may narrow further.


So, I do think, as I said just now, that restoring price stability is just something that we have to do. There isn't an option to fail to do that. Because that is the thing that enables you to have a strong labor market over time. Without restoring price stability, you won't be able, over the medium and longer term, to have a sustained period of very strong market conditions. So, of course, we serve both sides of the dual mandate, but we see them as well aligned on this.”


·         Fed is trying for a calibrated tightening (rate hikes); softish landing rather than abrupt actions (too high or too little) to control inflation and sustainable labor market; Fed wants to be ahead of the inflation curve


“We're trying not to make a mistake. Let me put it this way; we do see that there are two-sided risks. There would be the risk of doing too much and imposing more of a downturn on the economy than was necessary, but the risk of doing too little and leaving the economy with this entrenched inflation only raises the cost.

If you fail to deal with it in the near term, it only raises the cost of dealing with it later.”


·         Fed is going for faster tightening to manage higher inflation expectations so that it does not get enriched; otherwise, sticky longer-term inflation expectations will cause more price stability issues later. Thus Fed is frontloading rate hikes faster


“To the extent, people start to see it as just part of their economic lives. They start to factor high inflation into their decisions, on a sustained basis. When that starts to happen, and we don't think that's happened yet, but when that starts to happen, it just gets that much harder. And the pain will be that much greater. So I do think that it's important that we address this now and get it done.”


·         The U.S. is not in a recession currently but in a slowdown. If Fed considers the super strong Labor market and average trend rate of real GDP growth (+2.00%), the present contraction is a slowdown from prior higher economic growths; i.e. an adjustment


“So, I do not think the U.S. is currently in a recession. And the reason is there are just too many areas of the economy that are performing too well. And of course, I would point to the labor market, in particular. As I mentioned, growth is indeed slowing. For reasons that we understand; the growth was extraordinarily high last year, 5 and a half percent. We would have expected growth to slow.


There's also more slowing going on now. But f you look at the labor market, you've got growth, I think payroll jobs averaging 450,000 per month? That's a remarkably strong level for this state of affairs. The unemployment rate at near 50-year low was at 3.6 percent. All of the wage measures that we track are running very strong. So this is a very strong labor market, and it's just not consistent with-- 2.7 million people hired in the first half of the year? It doesn't make sense that the economy would be in recession with this kind of thing happening. So, I don't think the U.S. economy's in a recession right now.”


·         The actual measurement of GDP or economic output is very hard to measure in a big country like the U.S. and in any way, preliminary GDP numbers are always susceptible to a large revision later and have to be digested with a grain of salt


“Ah, haven't seen it and we'll just have to see what it says. I mean, I would say generally, the GDP numbers do tend to be revised pretty significantly. It's just that it's very hard to accumulate U.S. GDP, it's a large economy. And a lot of work and judgment goes into that. But you tend to take first GDP reports, I think, with a grain of salt. But of course, it's something we'll be looking at.”


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·         Looking ahead, Fed may not issue any clear guidance about rate action as it would take decisions meeting-by-meeting depending on various economic data (economic activities, labor market and inflation)

So, I'm going to take that as a question about the next meeting and thereafter. So, as I mentioned, we're going to be looking at all those things, activity, labor market, inflation. And we're going to be thinking about our policy stance and where does it need to be?

·         As Fed (rate) is now in the neutral zone, going forward Fed will slow down the rate hike process at some point

“And I also mentioned that as this process, now that we're at neutral, as the process goes on, at some point, it will be appropriate to slow down. And we haven't made a decision when that point is, but intuitively that makes sense, right?”

·         After front-loading very large rate hikes, Fed is now very closer to the terminal rate, which it thinks appropriate to bring inflation back to 2%

“We've been front-end loading these very large rate increases, and now we're getting closer to where we need to be. So that's how we're thinking about it.”

·         For September, Fed may go for another unusually large rate hike (+0.75%), but it’s not guidance and that’s a decision that FOMC will take in the meeting backed by economic data between late July to mid-September and the evolving outlook

“In terms of September, we're going to watch the data and the evolving outlook very carefully. And factor in everything and decide in September about what to do. I'm not going to provide any specific guidance about what that might be. But I mentioned that we might do another unusually large rate increase, but that's not a decision that we've made at all.”

·         Beyond September, Fed may hike further in the line of June dot-plots; i.e. Fed may keep the terminal rate of +3.50% by Dec’22 and may also hike another +0.50% by H1CY23

“So we're going to be guided by the data. And I think you can still think of the destination as broadly in line with the June SEP. Because it's only six weeks old-- And sometimes SEPs can get old quickly. I think this one I would say is probably the best guide we have as to where the Committee thinks it needs to get at the end of the year and then into next year. So I would point you to that.”

·         Fed will focus on both core PCE and core CPI inflation for its price stability mandate; although the Fed’s preferred gauge of inflation is PCE, the general public is habituated with CPI; Fed thinks the huge gap between PCE and CPI will eventually converge in due course


“So, it's an interesting situation. Of course, we've long used PCE because we think it's just better at capturing the inflation that people face in their lives. And I think that view is pretty widely understood. That said, the public reads about CPI. And the difference is because the CPI has higher weights on things like food, gasoline, motor vehicles, and housing than the PCE index does. And so that accounts for a lot of the difference.


However, over time, they tend to come together. Given its importance in the public eye of CPI, we are calling it out and noticing it and everything like that. But remember, we do target PCE. That is because we think it's a better measure. They will come together eventually.


The typical gap was about 25 basis points for a very long time. And if it got to 40 basis points, that would be very noticeable. And now it's much larger than that because of the things I mentioned. So we'll be watching both, but again, the one that we think is the best measure always has been PCE. At least since I think we-- some 20 plus years ago moved to PCE.”

·         Despite economic slowdown, labor market is quite strong; Fed wants moderation in demand, so that it can balance with existing supply capacity of the economy and brings inflation down (by creating sustainable slack in the economy)

“Well, just talking about demand for a second. As I mentioned in my remarks, I think you pretty clearly do see a slowing now in demand in the second quarter---Consumer spending, business fixed investment, housing, places like that. I think people widely looked at the first quarter numbers and thought they didn't make sense and might have been misleading in terms of the overall direction of the economy. Not true of the second quarter. But at the same time, you have this labor market.

So there are plenty of experiences where GDP has been reported as weak and the labor market as strong. And the economy has gone right through that and been fine. So that's happened many times. And it used to happen, if you remember in the first quarter of every year, for several years in a row, GDP was negative, and the labor market was moving on just fine. And it turned out to just be measurement error. It was called residual seasonality. We don't know the situation. The truth is, though, we think that demand is moderating.

We do. How much is it moderating? We're not sure. We're going to have to watch the data carefully. There are-- there is a great deal of money on people's balance sheets that they can spend. The unemployment rate is very low. The labor market's very hot. There are many, many job openings. Wages are high. So it's the kind of thing where you think that the economy should actually be doing pretty well in the second half of the year.


But we'll have to see. We don't know that. Because you do see a marked slowing in the second quarter that does-- that is fairly broad. So we'll be watching that, we'll be watching that. Of course, as I mentioned, we do want to see demand running below potential for a sustained period to create slack and give inflation a chance to come down.”


·         There may be some early indications that labor demand is moderating, but supply is not catching up as expected


So I think you're already seeing-- you've seen in the labor market what you've seen is a decline from very high levels of job creation last year and earlier this year, to modestly slower job creation-- Still quite robust, as I mentioned. So you're seeing that. You're seeing some increase in initial claims from insurance, although that may have to do with seasonal adjustments. We're not sure that that's real. There's some evidence that wages if you look at average hourly earnings, appear to be moderating. Not so yet from the other wage measures. And we'll be getting the employment compensation index measurement I think on Friday, I guess. And that's a very important one because it adjusts for composition.


·         An early indication that the labor market may be moving back into balance


“So I'd say you-- and also, anecdotally, you hear much-- the sort of level of concern on the part of businesses that they simply can't find workers is probably down a little bit from what it was, say, for example, late in the latter parts of last year. So, there's a feeling that the labor market is moving back into balance. If you look at job openings or quits, you see them moving sideways or perhaps a little bit down. But it's only the beginning of an adjustment. But I think most-- also, if you look at, I mean, once you start citing these things, you can't stop”.


·         As per the household survey, no jobs were created in the last three months (on the net)


“If you look at the household survey, you see much lower job creation and the household survey can be quite volatile, but it has no jobs created in the last three months. So that might be a signal that job creation's a little bit slower than we're seeing in the establishment survey. So executive summary, I would say, there's some evidence that labor demand may be slowing a bit; Labor supply, not so much. We have been disappointed that labor force participation hasn't moved up since January. That may be related to yet another big wave of COVID. And there's evidence that that's the case. But so we're not seeing much in the labor supply. Nonetheless, I would say some progress on demand supply getting back in alignment.”


·         Fed will think about pausing rate hikes only if it sees inflation is coming down meaningfully and gives confidence that it will further go down to 2% levels on a sustainable basis; Fed will not consider some slowdown in the labor market for any pausing

“So I think we're going to be looking at inflation as well. As I mentioned, we need to see inflation coming down. We need to be confident that inflation is going to get back down to mandate consistent levels. That's not something we can avoid doing. That needs to happen. And we do think, though, that the labor market can adjust because of the huge overhang of job openings of excess demand. There should be able to be an adjustment that would have lower than-- perhaps lower than expected increases in unemployment. Lower than would be expected in the ordinary course of events. Because the level-- the ratio of vacancies to unemployed is just out of keeping with the historical experience. And that suggests that this time could be different.”

·         U.S. economy seems not in a recession right now, but in a slowdown from above trend growths in the previous year/quarters; overall demand and labor market are still strong and the economy is also on track to continue to grow in 2022, but Fed is also carefully watching Q2 slowdown


“So as I mentioned, it doesn't seem that the U.S. economy is in a recession right now. And I think you do see weakening, some slowdown, let's put it that way, in growth. And you see it across some of the categories that I mentioned. But there's also just the very strong data coming out of the labor market, still. So, overall, you would say that in all probability, demand is still strong. And the economy is still on track to continue to grow this year. But the slowdown in the second quarter is notable. And we're going to be watching that carefully.”


·         Fed is trying its best for a soft/softish landing despite the chorus of recession; huge surplus demand in the labor market may ensure a stable unemployment rate going forward despite economic slowdown; soft landing is Fed’s aspirational aim, may or may not be achievable considering lingering geopolitical event (Russia-Ukraine war)


“Well--- We've said since the beginning, I think, that having a soft landing is what we're aiming for. Of course, that has to be our goal, it is our goal. And we'll keep trying to achieve it. I do think events; at the beginning, we said it was not going to be easy. It was going to be quite challenging to do that. It's unusual. It's an unusual event, it's not a typical event given where we are. If there is a path to it, and we think there is, it is the one I mentioned. That the labor market is-- it's such a large amount of surplus demand, that you could see that demand coming down in a way that didn't translate into a big increase in unemployment as you would expect in the ordinary course because frankly, the imbalance is so much greater. And—but we don't know that. This is a case of first impression.


So anyone sure that it's impossible or sure that it will happen is probably underestimating the level of uncertainty. And so I would certainly say it's an uncertain thing. Nonetheless, it's our goal to achieve it, and we'll keep trying to do that.”


·         QT is running at a satisfactory/sensible pace; will be accelerated to full strength from September and the market should absorb it; QT may run for 2-2.5 years with a calibrated pace, but much faster than last time

“So we think it's (QT) working fine. As you know, we tapered up into it. And in September, we'll go to full strength. And the markets seem to have accepted it. By all assessments, the markets should be able to absorb this. And we expect that will be the case. So, I would say the plan is broadly on track. It's a little bit slow to get going because some of these trades don't settle for a bit of time. But it will be picking up steam. So I guess your second question was getting-- the process of getting back down to the new equilibrium will take a while.

And that time, it's hard to be precise, but the model would suggest that it could be between two, two and a half years, that kind of thing. And this is a much faster pace than the last time. Balance sheet's much bigger than it was. But we look at this carefully and we thought that this was the sensible pace. And we have no reason to think that it's not.”

·         Recent slowing down in financial conditions tightening; i.e. lower bond yields is a result of stable/ some dip in inflation expectations, and lower breakeven; it seems that the market has confidence in Fed’s commitment to bring down inflation back to 2%

“So, a big piece of that is inflation expectations---Break evens coming down--Which is a good thing. It's a good thing that markets do seem to have confidence in the Committee's commitment to getting inflation back down to 2 percent. So we'd like to see market-based ratings of inflation expectations come down. Broader financial conditions have tightened a good bit. The way this works is we set our policy and financial conditions react, and then financial conditions are what affect the economy. And we don't control that second step. We're just going to do what we think needs to be done.”

·         Fed will continue to hike to a level, where it’s confident that inflation will be moving down back to 2%; Fed will ensure appropriately tighter financial conditions to moderate demand and inflation thereof

“We're going to get our policy rate to a level where we're confident that inflation will be moving back down to 2 percent---Confident--- So that's how we're going to take it. And of course, we'll be watching financial conditions to see that they are appropriately tight. And that they're having the effect that we would hope they're having, which is to see demand moderate and inflationary pressures recede and ultimately inflation come down.”

·         Fed is not far behind the curve; even if Fed goes for liftoff 3-months earlier, it would not be a big difference because of underlying fluid geopolitical tensions (Russia-Ukraine/NATO)


“So, yeah, we said that we wouldn't lift off until we had achieved our dual mandate goals. And the reason we did it in real time was that the first look at the new framework that we'd rolled out, plenty of people were saying it's not credible, you'll never get inflation to 2 percent. Some of our critics now who say inflation's too high were the same ones who were saying you'll never get to 2 percent. Well, but anyway. That's what happened. So, we thought we needed to make a strong statement with that. It wasn't part of the framework. The December '20 guidance was not part of our overall new framework, it was just guidance that we put in place.


So, I would say two things. One, I don't think that that has materially changed the situation. But I have to admit, I don't think I would do that again. I don't think I would do that again. Ultimately, the situation evolved in a highly unexpected way for all of us. And maybe the learning that leaves a little more flexibility than that. But did it matter in the end? If you look at-- I don't think it did, I'm not sure it would have mattered if we'd been raising rates three months earlier, does anybody think that would have made a big difference? I mean, lots of central banks were raising rates three months earlier and it didn't matter. I mean, this is a global phenomenon that's happening now---Admittedly, different in the United States. But anyway---“


·         Fed is trying its best to avoid 2013/18 like taper tantrum and thus doing QT in a balancing/calibrated way


“So I think we learned, there have been multiple taper tantrums, right? So there was the famous one in 2013. Here's what happened at the December '18 meeting where markets can ignore developments around the balance sheet for years on end, and then suddenly react very sharply. So we just had developed a practice of moving predictably and doing it in steps and things like that. It was just like that's how we did it. And so we did it that way this time. We were careful to take steps and communicate and all that kind of thing.


Yeah, we were trying to avoid a tantrum---Because they can be quite destructive. They can tighten financial

conditions and knock the economy off kilter. And when it happens, you have to, really in both 13 and 18, had consequences for the real economy, two, three, four months later. So we were trying to avoid that. That was part of it.”


·         U.S. economy was limping back to normal from COVID restrictions, but a sudden adverse geopolitical event (Russia-Ukraine) changed all the equations

Again, I don't think that's-- the real issue of 2020 and '21 was just trying to understand what was happening with the reopening economy. That was where the big uncertainty was. And our view was that these supply-side issues would get better. That people would go back to work, that labor force participation would come back. Everyone would get vaccinated, schools would open. Kids would be in school. And labor force participation would jump back up. That's what we were-- very broadly thought to be the case. These supply-side issues would get solved reasonably quickly and they just haven't. They still haven't.


So that's really, the learning I think is around how complicated these supply-side issues can be. We haven't seen this before in a long, long time. And so, that's really what accounts for the pace at which we moved. And we did-- when inflation changed direction, really, in October. We've moved quickly since then. I think people would agree. But before then, inflation was coming down month by month. And we kind of thought we had the story. Probably had the story right. But then I think in October, you started to see a range of data that said no. This is a much stronger economy and much higher inflation than we've been thinking. And again, we've pivoted and here we are.”


·         Fed is not an appropriate institution to judge whether the U.S. economy is in a recession; Fed has focused on its dual mandate of maximum employment and price stability. Despite negative U.S. GDP growth, the labor market remains strong. Fed also thinks the current GDP model does not catch the overall economy; Fed is not bothered whether the U.S. is in a recession but watches the GDP report carefully


“So the Fed doesn't make a judgment on that. We're focused on the dual mandate and using our tools to achieve maximum employment and price stability. We don't say there is now a recession and that kind of thing. So that wouldn't be something we'd do. We would look at the data tomorrow and no doubt, we'll look at it very carefully and draw whatever implications we can.


As I mentioned, though, if you think about what a recession is, it's a broad-based decline across many industries that sustain for more than a couple of months and there are a bunch of specific tests in it. And this just doesn't seem like that. Now. What we have right now doesn't seem like that. And the real reason is that the labor market is just sending such a signal of economic strength that it makes you question the GDP data. But again, that's not a decision that we make. And we won't conclude one way or another on that”


Powell didn’t promise any type of rate hike pause in September, November, and December. Overall, still elevated ECI, inflation, and inflation expectations data along with some moderation in U.S. economic growth/labor market will ensure at least +0.50% rate hikes by Fed in September, November and December. And Fed will also look into similar economic data for July and August before the September rate action and if inflation is still elevated, Fed may also hike +0.75% in September instead of +0.50%.

Overall, the Dec’22 terminal rate may be +4.00% to +4.75% as per the actual inflation trajectory, if Russia-Ukraine/NATO geopolitical tensions and subsequent economic sanctions continue Overall, Fed Chair Powell looks less confident in inflation control and to justify ongoing rate hikes, is also not ready to acknowledge a possible technical recession. As per Powell, Fed is on the right path for faster tightening and calibrated slowing down of the economy, which is causing lower demand gradually and an eventual balancing with the present supply capacity of the economy. This will result in lower inflation in due course. But Fed is much behind the inflation curve and the U.S. economy is already in a stagflation-like scenario. The U.S. needs a real rate at positive or at least zero assuming a 5% core CPI by Dec’22. Thus the Fed’s terminal rate should be at least 5% instead 4% by Dec’22.

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