Takeaways from the FED's MPC speech May 24'

In a press conference on May 1, 2024, Federal Reserve Chair Jerome Powell addressed the economic outlook and monetary policy decisions. Here's a breakdown of key points delivered by Powell:

Inflation:

Powell highlighted a decrease in inflation over the past year alongside a strong labor market. However, he emphasize that inflation remains higher than desired, and its further reduction is uncertain. The Federal Open Market Committee (FOMC) has decided to maintain the policy interest rate unchanged and continue reducing securities holdings, albeit at a slower pace. While acknowledging the downward pressure on economic activity and inflation due to the current monetary policy stance, yet he noted that the recent months to have shown a lack of progress in inflation reduction, prompting continued vigilance.

Economic Growth:

Economic indicators suggest ongoing solid expansion, although GDP growth slowed from the previous quarter. Notably, Private Domestic Final Purchases, a key indicator of underlying demand, remained strong. Consumer spending has been robust despite high interest rates affecting housing and equipment investment. The labor market is relatively tight, with strong job creation and increased worker supply, yet labor demand still exceeds supply. Inflation has decreased but remains above the 2 percent goal, with some unexpected increases this year.

Balance Sheet:

Regarding the balance sheet, the Committee decides to slow the pace of decline in securities holdings, adjusting the cap on Treasury redemptions and maintaining the cap on agency securities. This adjustment aims to ensure a smooth transition, reducing the risk of money market stress while facilitating a gradual decline in securities holdings consistent with reaching appropriate reserve levels.

Conclusion of speech:

They maintain the target range for the federal funds rate and the process of reducing securities holdings, considering risks and uncertainties in the economic outlook. No adjustment to the target range is expected until greater confidence in sustainable inflation movement is gained. The Committee remains prepared to respond to unexpected labor market weakening while avoiding premature or excessive policy restraint that could reverse progress on inflation or weaken economic activity.

Press Conference:

Current Monetary Policy

Chair Powell, during a press conference, provides insights into the current monetary policy stance and its impact on inflation and the labor market. He acknowledges the restrictive nature of current policies, citing evidence such as a cooling demand in the labor market and decreased interest-sensitive spending. Powell expresses confidence in the policy's sufficiency over time, although its effectiveness will be determined by future data.

Powell highlighted progress made in reducing inflation, citing a decrease from a peak of 7.1 to 2.7 in headline consumer prices. He noted that current restrictive monetary policy, coupled with supply-side improvements, is effectively curbing inflation, despite challenges posed by supply chain disruptions.

Inflation scenario

Regarding inflation dynamics, Powell highlighted unexpected increases in goods and non-housing services inflation, contributing to a longer timeline for inflation reduction. He anticipated inflation would gradually decrease over the year, though his confidence in this forecast had diminished due to recent data.

Rate hikes

Regarding potential rate hikes, Powell deems them unlikely, emphasizing the focus on maintaining the current restrictive stance until there is persuasive evidence that it's insufficient to bring inflation down to 2 percent sustainably. He asserts that inflation expectations need to be anchored and stable for any policy changes.

Rate cuts

When questioned about potential rate cuts, Powell states that decisions will depend on incoming data, the evolving economic outlook, and risks. He mentions scenarios where rate cuts could be warranted, such as persistent inflation or unexpected weakening in the labor market.

On the labor market, Powell highlighted that a significant unexpected weakening would prompt consideration for rate cuts, rather than minor fluctuations. He emphasized the importance of considering various factors before making decisions.

Financial Conditions

The discussion then shifts to financial conditions' impact on growth and inflation. Powell notes that while financial conditions have eased, growth remains similar to previous years, indicating a disconnect between financial conditions and inflation. He acknowledges tighter financial conditions due to higher rates and suggests they are appropriate given inflation trends.

Addressing a question on the apparent contradiction between quantitative tightening and steady interest rates, Powell clarified that reducing quantitative tightening aimed to smooth the balance sheet reduction process without causing financial market disruptions.

Intervening in wage growth

Regarding the labor market's strength and wage growth, Powell cautions against directly targeting wage growth, highlighting the complex interplay between supply-side distortions, demand-side factors, and monetary policy. He emphasizes the Fed's focus on price inflation and the importance of managing wage increases to ensure they don't exacerbate inflationary pressures.

Stagflation

Concerning stagflation, Powell dismissed the notion, citing current economic indicators—3 percent growth and inflation below 3 percent—as inconsistent with stagflation, which historically involved high unemployment, high inflation, and slow growth. He maintained optimism about the economy's trajectory, projecting a return to sustainable growth and inflation around 2 percent.

Productivity and Potential Output

Powell acknowledged a significant increase in potential output due to factors like increased labor force participation and immigration. This led to a discussion about whether productivity growth will persistently exceed its trend. He highlighted uncertainties in forecasting potential output for the current and upcoming years.

Housing inflation

The discussion then shifted to housing inflation, with Powell acknowledging delays in rental market adjustments affecting inflation metrics. He explained that while market rents have remained low, there's a lag before these changes are reflected in tenant leases, attributing this to landlord practices. Powell expressed confidence that low market rents will eventually impact measured inflation, albeit with uncertain timing due to longer-than-expected lags.

Coordinated Central Bank response

Regarding global economic trends, Powell acknowledged a shift from synchronized central bank policies to potential divergence, as evidenced by recent economic data and statements from central banks in developed markets. He recognized the implications and risks this presents for the Federal Open Market Committee (FOMC), signaling a need for cautious consideration of international economic dynamics in their policy decisions.

Note: I utilized AI ChatGPT for assisting in summarizations