Powell puts 75 basis point hike on table for September, Fed ‘committed’ to cutting inflation, come heck or high water: Most hawkish FOMC press conference I’ve ever watched

‘Low-income people are suffering from high inflation’: Powell seems to want the markets out of denial.

By Wolf Richter for WOLF STREET.

The FOMC today voted to raise all policy rates an additional “abnormally high” 75 basis points, the second consecutive such hike, the most hawkish moves since 1994, with no one dissenting, and even Esther George, who had dissented the last time, was on board.

This brings the Fed’s target for the fed funds rate to a range between 2.25% and 2.50%, which is still very low given that CPI inflation has climbed to 9 .1%, but this is much higher than February’s close to 0%.

During the press conference following the meeting, the most hawkish press conference I have ever listened to, Powell tried to get the message across to the markets that lower inflation is the No. 1 and the Fed would cut it, come heck or high tide.

Powell has put another 75 basis point hike on the table for September.

To make sure everyone got it, he repeatedly said that “another unusually large increase might be appropriate at the next meeting”, depending on the inflation data, thus putting another increase of 75 basis points on the table for the September meeting.

Another 75 basis point hike in September would bring the Fed’s target for the federal funds rate to a range between 3.0% and 3.25%.

Out the window came the notion of a “pause” in September that had been ridiculously hyped by some tightening deniers a few months ago.

And Powell said “we wouldn’t hesitate” to go even higher – so maybe a 100 basis point hike – if the inflation data came in.

He repeatedly said that the Committee was “determined” to tighten financial conditions, and that it was “necessary” to slow the economy, and that it was “necessary” to slow demand, and that it was “necessary” to slow down the workforce. market to bring inflation down.

And inflation is going to be the priority until “we are confident that inflation is on a downward path to 2%”.

“Suffering from inflation.”

“People on low incomes suffer from high inflation,” Powell said. “We know inflation is too high…especially for people who live paycheck to paycheck,” he said. “Middle-class and wealthy people have resources to deal with inflation,” he said. But low-income people don’t.

In the lowest income spectrum, “we see a real decline in food consumption,” he said, pointing out that people in this income category spend all their money on necessities, such as food, gas and rent, and that these are the necessities where inflation has been the worst, and these people bear the brunt of it and can least afford it.

Would a recession stop rate hikes?

After all that hawkish talk, he was asked how a recession would change Fed policy.

“We believe it is necessary to slow growth,” he said. “We need a period of below-potential growth,” and he expects “some easing of labor market conditions” and that labor market easing will be “necessary.”

He repeated over and over again, for everyone to understand, that high inflation hinders economic growth and long-term “full employment” because of all the problems it causes, and that it was necessary reduce inflation to achieve the Fed’s target. dual mandate of price stability and full employment.

“We are going to focus on reducing inflation,” he said. “Price stability is the foundation of the economy” and for a strong labor market and for growth, he said.

Economic growth and a strong labor market will not happen without bringing down inflation, he said. “Restoring price stability is what we Must do,” he said.

Doing too little costs a lot more.

And he was asked about the risk of “doing too much”, of raising rates too much.

He said the risk of “doing too little” is that inflation might not come down, which would then increase the costs of doing it later, when inflation was really entrenched, and then it would be more difficult and ” more painful” to lower inflation. , because once people start pricing in high inflation, it becomes very difficult and painful to dislodge from it.

“A soft landing is our goal, we keep trying to achieve it,” he said, but it’s “a very uncertain thing.”

The line of Holocaust deniers ran with it, out of context.

After the “frontloading” of rate hikes – 1x 25bps, 1x 50bps, 2x 75bps and maybe another 75bps in September – what’s next?

Powell said: “As the monetary policy stance tightens further, it will likely become appropriate to slow the rate of increases as we assess how our cumulative policy adjustments affect the economy and inflation.

So maybe in the November and December meetings, go for a raise of 25 basis points each.

And that makes sense because they’ve already pushed rates much higher than we imagined earlier this year, and if they don’t slow down with these “abnormally large” rate hikes, they could be close to 5 % by the end of the year, which would be fine with me, but it would be a huge jump, from almost 0% in February.

He said he expects, in line with the Fed’s guidance from June, that the Fed’s key rates will be “moderately restrictive” by the end of the year, which in June meant between 3.0% and 3.5%. But all tightening projections have been revised upwards at each meeting. So we’ll see.

The Fed raised all its key rates by 75 basis points today.:

  • Target range for federal funds rates, between 2.25% and 2.50%.
  • The interest it pays to banks on reserves, at 2.4%.
  • Get interested charges on day-to-day pensions, at 2.5%.
  • Get interested pay on overnight Reverse Repos (RRP), at 2.3%.
  • Primary credit rate it charges banks, at 2.5%.

Rate cuts? Not so fast.

With the Fed’s target range for the federal funds rate being between 2.25 and 2.50%, the effective federal funds rate (EFFR) will be around 2.37% going forward.

But CPI inflation is now 9.1%, and the “true” EFFR is negative 6.7%, which is the minimum by which the Fed has lagged inflation. Its slowness to react to inflation is unprecedented in modern times. At this point, the Fed is still pour fuel on the inflation fire. But he is now trying to catch up and is progressing at the fastest pace since 1994.

When will the Fed cut? According to some people a few months ago, the Fed should have already cut today, or at the latest in September.

But the Fed never started cutting rates when the CPI was above EFFR. If this holds true in this cycle, the CPI should fall below the EFFR, or the EFFR should rise above the CPI, or a combination of both, before the Fed engages in rate cuts, and it will probably take a while by the looks of it:

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