US is “on an unsustainable fiscal path, there’s no hiding from it.”

Wolf Richter,

I have to say, Fed Chairman Jerome Powell is a breath of fresh air when he talks, after the near-physical pain I experienced listening to his last three predecessors. I actually get what he is saying, even if it’s a little twisted. I can make out his veiled disdain for fancy but dubious economic theories and iffy forecasts. And I get to look forward to some zingers when I least expect them – such as at today’s press conference, when he valiantly defended the Fed’s preferred inflation measure, core PCE, by saying that it “tends to run a little lower, but that’s not why we pick it.”

About that wildly ballooning federal deficit:

Even though the question came at the end of the press conference, I’m pulling it to the top because it’s so important. Asked if fiscal policy – the ballooning deficit, after tax cuts and spending increases – comes up a lot at FOMC meetings, he said:

“It doesn’t really come up. It’s not really our job…. We don’t have responsibility for fiscal policy. But in the longer run, fiscal policy will have a significant impact on the economy, so for that reason, I think, my predecessors have commented on fiscal policy, but they have commented on it at a high level rather than trying to get involved in particular measures.

“My plan is to stick to the same approach, and stay in our lane. So I would just say, it’s no secret, it’s been true for a long time, that with our uniquely expensive healthcare delivery system and the aging of our population, we’ve been on an unsustainable fiscal path for a long time. And there is no hiding from it, and we will have to face that, and I think the sooner the better.

“These are good times. This is the economy in the range of full employment. Interest rates are low. It’s a good time to be addressing these things. So I put that out there and leave it at that.”

About that mysteriously vanished sentence:

A sentence that had vanished from the FOMC statement today, after having been standard for years – “The stance of monetary policy remains accommodative” – caused instant media speculation that the Fed would “pause” next year, in line with persistent bias in the media of seeing every vagueness as a dovish signal.

Powell shot this down several times, first in his prepared statement and then in the Q&A. In the statement, he emphasized, “overall financial conditions remain accommodative,” and specifically addressed the disappearance of that sentence:

This change does not signal any change in the likely path of policy; instead, it is a sign that policy is proceeding in line with our expectations. We still expect, as our statement says, “further gradual increases….”

During the Q&A, he was asked about it several times, from different angles. And he expanded on the theme:

“The point with ‘accommodative’ was that its useful life was over. We put that in the statement in 2015 just when we lifted off [beginning of rate-hike cycle]. The idea was to provide assurance that we weren’t trying to slow down the economy, but that in fact interest rates were still going to be pushing to support economic activity. That purpose has been well served, and that language now doesn’t really say anything that’s important to the way the committee is thinking about policy going forward. That’s why it came out.”

He was asked if the Fed’s policy is accommodative now – meaning if the federal funds rate is still below some theoretical “neutral” rate at which it would neither stimulate nor slow the economy. And he said:

“The federal funds rate, even after today’s move, is below the longer-run neutral estimate of every single participant who submits an estimate. So that’s why it’s the perfect time to take the language out because it’s perfectly clear that there can’t be a signal because by definition that means an accommodative policy. So it wasn’t because the policy is not accommodative. It is still accommodative.”

And just to make sure everyone got it, he threw in “another point too”:

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“We don’t want to suggest either that we have a precise understanding of where ‘accommodative’ stops, or suggest that that’s a really important point in our thinking…. What we’re going to be doing is carefully monitoring incoming data from the financial markets and the economy and asking ourselves if our policy is achieving the goals we want to achieve: Sustain the economy, maximum employment, and stable prices. That’s the way we’re thinking about it. That does kind of amount to thinking less about one’s precise point-estimate of the natural rate.”

“You can think of it in different ways. Maybe we have underestimated the neutral rate, maybe we’ll be raising our estimate of the neutral rate, and we’ll just go to that. Or maybe we’ll keep our estimate of the neutral rate here [he made a precise gesture with both hands] and then go one or two rate increases beyond it. I think it’s very possible.”

What could change the rate-hike tango?

The FOMC would raise rates faster “if inflation surprises to the upside,” he said, but “We don’t see that.”

And the FOMC would raise rates more slowly if there is:

  • “A significant correction in the financial markets,” which, as he explained later, is one that causes consumers to spend less, such as the mortgage meltdown did during the Financial Crisis, while a standard sell-off in the stock market would not qualify.
  • “A slowing down of the economy that is inconsistent with our forecast.”

The risk after the Financial Crisis is to “forget things we learned”:

Asked about the biggest lessons learned from the Financial Crisis, he listed some of the big changes in the financial system since then, such as higher capital, more liquidity, better regulation, etc., and then added:

“Those are the really important lessons. We were determined not to forget them. And I think that’s a risk now, is to forget things that we learned. That’s just human nature over time.

No problem that higher rates whack consumers:

Asked if he was concerned about the impact of higher rates on consumers, with credit-card rates having reached “17%,” he replied:

“Interest rates are going up across a broad range of consumer borrowing…. But they’re still quite low by historical levels.

“And the other thing I’ll say, if you take housing, if you look at the NAR affordability index, housing is still more affordable now than it was before the Financial Crisis. So the cost of borrowing is going up, but it’s going up from what were extraordinarily low levels.

Being “humble” about productivity forecasts:

“We’re so bad at forecasting productivity, it’s just very hard to know when productivity is going to arrive and in what quantity…. So I think we have to be humble about how little we really know about where these variables either are, or are going.”

Core PCE inflation “tends to run a little lower, but that’s not why we pick it”

In response to a question about wage growth, he explained as an aside, how wage growth is adjusted for inflation to get “real” wage growth.

The indicators of nominal wage and benefit growth are “clustered around 3%,” he said. But then you have to figure inflation into it to get real wage increases.

“And there you have to pick an inflation measure. Some people pick CPI [= 2.7%]. We of course pick Personal Consumption Expenditures [core PCE = 2.0%] because we think it’s a little better measure, it’s a little broader, and it tends to run a little bit lower as well, but that’s not why we pick it…”

Darn, and I thought all along that’s precisely why they picked it.


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