When Jay Powell took to the lectern to give his first press conference of 2023, the Federal Reserve Chairman stuck to much the same script he’s been using since the U.S. central bank began raising interest rates. rate last year.
He spoke of the Fed’s unwavering commitment to eradicating high inflation and pledged to continue compressing the economy until it is defeated, insisting that the central bank will not do so. has not yet finished with its interest rate hike campaign.
“We are going to be careful about declaring victory and sending signals that we think the game is won, because we still have a long way to go,” he told reporters on Wednesday after the Fed raised its benchmark rate by a quarter point. This marked a step back from the larger increases the central bank has relied on in recent months and a return to a more conventional pace of tightening.
But even though Powell gave up on the idea that the Fed would ease anytime soon – leaving open the possibility of two more 25 basis point increases to come – he was decidedly more optimistic not only on the economic outlook, but also on the influence of the central bank. on inflation.
That helped fuel a rally in US government bonds and stocks, with the S&P 500 closing at its highest level since last summer.
“People went into this thinking thinking it might have the same chastising tone it did in December,” said Julia Coronado, a former Fed economist who now runs MacroPolicy Perspectives. “He looked more positive and more optimistic.”
Powell’s optimism may have been subtle, but it was evident throughout the Q&A session. While he maintained that price pressures were still unacceptable, he repeatedly said that the “disinflationary process” was underway. Moreover, he said he saw a “pathway” to bring inflation back to the Fed’s 2% target without “a really significant economic decline or a significant increase in unemployment.”
Powell also seemed more relaxed about a recent easing in financial conditions and the fact that traders in fed funds futures don’t seem to believe the central bank will have to raise rates to the levels implied by officials’ projections being given that they expect inflation to moderate faster. . He even went so far as to suggest that officials might consider reversing course sooner if upcoming data suggests so.
It marked a significant de-escalation in a months-long struggle with traders who refused to back down on bets that the Fed would not raise the benchmark rate to at least 5% and hold it there for the rest of the year.
Wednesday’s increase took the federal funds rate to between 4.50% and 4.75%. Most officials have signaled that the Fed needs to raise it to 5.1% before considering cuts in 2024 at the earliest. Still, traders’ bets suggest he will start easing monetary policy before the end of the year.
“Perhaps Powell was in no mood to fight the market because he wasn’t convinced the market inflation outlook was wrong,” suggested Michael Feroli, a former Fed economist now. at JPMorgan.
Powell’s comments were dovish enough to cause consternation among economists who had thought the Fed would raise rates in March and again in May before taking a breather.
For example, Jefferies’ Aneta Markowska said she’s now a little less confident in her base-case scenario that the Fed will follow with a final quarter-point hike in May. “Whether they stop in March or May really depends on how you think the data will go,” she said.
Not all economists are so optimistic, especially given fears that progress on inflation is slowing. Peter Hooper, global head of research at Deutsche Bank, said: “People who were inclined to research things to be optimistic picked on those parts and perhaps didn’t give enough weight to the direction of the overall message.”
Hooper, who worked for the Fed for nearly 30 years, said the central bank was trying to communicate that it planned to raise rates “a few more times.” . . to arrive at a significantly more restrictive level.
Şebnem Kalemli-Özcan, an economist at the University of Maryland and a member of the New York Fed’s economic advisory board, also warned that booming markets and even looser financial conditions could harden central bank resolve. .
“If stock markets continue to soar, that means there is growth going forward and all is rosy,” she said. “People are starting to spend more, and that’s what the Fed doesn’t want.”
“They don’t want people to buy things and they don’t want people to borrow to buy things,” Kalemli-Özcan added. “They want to slow down the sentiment.”
