Powell expects to cut rates before inflation declines to 2%

[mostlylong]

The Fed and its policymakers are famously vague and nuanced in their statements. The financial community carefully parses Fed statements for any predictor of future policy action. For the current policy cycle, it’s clear that the Fed wants inflation to reach its 2% target, but the Fed is not specific about the path the policy rate (Fed Funds rate) might take to achieve the 2% target.

Will the Fed stop raising rates if inflation reaches a certain value?
Will the Fed begin cutting rates if inflation reaches a certain value?

In general, Powell and the Fed aren’t saying.

Yet posts (Control Panel: Debt ceiling crisis resolved? - #38 by mostlylong and Inflation Slowing - #10 by mostlylong) have said:

@tjscott0

Powell never said he would stop after one more rate hike,. In fact he said rate hikes would continue until inflation is down to the 2% level.

@WendyBG

The Federal Reserve has said many times that it will not reduce the fed funds rate until inflation has declined to its target of 2% and stayed there for an extended period of time.

And I questioned whether the Fed or Powell made such a specific statement at any time in the current policy cycle because I could find no such statement.

Replying to @WendyBG

@mostlylong

My point is the Fed has never said that inflation needs to get to a specific number (y%) before the Fed will take a specific action (raise, pause, cut). Although maybe I missed it.

Replying to @tjscott0

@mostlylong

I very much doubt that Powell said what you state in bold. Powell and the Fed are quite careful in their wording.

Can you share a quote from a Fed statement or from Powell individually that matches your wording in bold?

I cannot find such a statement and I would be curious if you can.

But apparently such statements are everywhere,

@WendyBG

You sure enough did miss it. Take my word for it. I don’t feel like spending the time digging through all of Powell’s speeches…again.

and,

@WendyBG

Yes, Powell did say that the Fed plans to keep the fed funds rate at a level that maintains the 2% target for an “extended period” to avoid the rebound that was seen in the 1970s.

and @MataroPete,

@MataroPete

You’re right, especially since it doesn’t take too much time to find this out all by oneself. Just one such quote is at: When Will The Fed Stop Raising Rates? | Bankrate

“Policy has got to be tight enough to bring inflation down to 2 percent over time,” Powell said. “It doesn’t all have to come from rate hikes. It can come from tighter credit conditions. It’s highly uncertain how long the situation will be sustained or how.”

Sometimes google actually is your friend.

But, in Powell’s December press conference (Powell press conference 20231213), for the first time I have seen, the Fed did speak more specifically on this topic.

Powell said, in response to a question:

[Question:]…So when looking in the different components of the data,
how much closer do you have to get to 2 percent before you consider cutting rates?
CHAIR POWELL. I mean, the reason you wouldn’t wait to get to 2 percent to cut rates is that policy would be, it would be too late. I mean you’d want to be reducing restriction on the economy well before 2 percent because – or before you get to 2 percent so you don’t overshoot,

Rephrasing, it’s clear that
Powell’s expectation is that the Fed would cut rates before inflation declines to their 2% target.

This only makes sense if we believe policy acts with a lag on the economy (as is so often stated).

What Powell said is the opposite of:

@WendyBG

The Federal Reserve has said many times that it will not reduce the fed funds rate until inflation has declined to its target of 2% and stayed there for an extended period of time.

Again, I cannot find where the Fed has ever said this in the current policy cycle (and no one has provided a quote). Powell’s recent press conference explains why such a statement almost certainly does not exist (but maybe it is out there, I’m open minded if it exists).

Looking forward to future policy decisions, trailing twelve month PCE inflation is already down to 2.6% through November, so perhaps the Fed needs to think about cutting rates if they are going to act on what he said in the press conference. Another nuance is that when Powell says 2% inflation as a target, it’s not exactly clear which measure(s) he means (headline, core, trailing twelve month, quarterly, something else ?).

[Goofyhoofy]

I like the airplane analogy if we’re going to talk about “soft landings”. There are certain motions you take once the wheels touch terrafirma, (in this analogy that would be the 2% goal),but you don’t just happily descend at rate until the wheels touch: you reduce speed, you flare, you pop out the spoilers, you slow down all in preparation for the “soft landing”.

The actions, preparing for the landing happen prior To hitting the actual pavement - or in this case, the 2% mark, and you do that because you don’t want to punch through to the other side. In an airplane it would be embarrassing and leave a lot of dead bodies and shards of metal on the runway. With an economy it would leave things below the perfect 2% line, possibly treading on disinflation which is a worse sin than inflation itself.,

When he says “We won’t stop until we get to 2%, I don’t think he means “we’re going to go balls to the wall until the last possible second and then whiplash back into an accommodation policy. I take it that “floating down” around 2% would be most desirable,and being a tenth or two high or low would be pretty damn laudable.

[mostlylong]

I agree with your post, but just to be precise, Powell never said this:

@Goofyhoofy

When he says “We won’t stop until we get to 2%,

Or if you really think he gave that exact of a statement, please provide the specific quote. No one has been able to provide it.

Powell’s statements were more of the flavor “We’ll stay restrictive until we are confident we are on our way to 2%.”

For example, in the December press conference Powell said:

“We are committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation sustainably down to 2 percent over time, and to keeping policy restrictive until we are confident that inflation is on a path to that objective.”

Being on our way to 2% is not the same as reaching 2%. And even if rates are paused (the Fed makes no change), policy becomes more restrictive as inflation falls and real rates then increase. So doing nothing can be more restrictive if inflation is declining.

Thanks for listening.

[Goofyhoofy]

@mostlylong

Or if you really think he gave that exact of a statement, please provide the specific quote. No one has been able to provide it.

OK got me. That’s the shorthand for when the Fed says things like “ Federal Reserve Chair Jerome Powell said at least two interest-rate increases are likely necessary this year to bring the inflation rate down to the US central bank’s 2% target and that acting at consecutive policy meetings isn’t “off the table.” (Bloomberg, June 2023).

AndI wouldn’t use the December verbiage, since it’s clear Powell (and those before him) shape-shift the language depending on where they are in the process - and it’s pretty clear that we are on the way (in some ways already reached) the 2% goal.

[DrBob2]

@Goofyhoofy

and it’s pretty clear that we are on the way (in some ways already reached) the 2% goal.

It is worth noting that, including dividends, the S&P500 is at an all-time high.

DB2

[Divitias]

@Goofyhoofy

AndI wouldn’t use the December verbiage, since it’s clear Powell (and those before him) shape-shift the language depending on where they are in the process - and it’s pretty clear that we are on the way (in some ways already reached) the 2% goal.

That 2% goal may be harder to reach than Powell thinks:

Container rates hit $10,000 as ocean freight inflation soars in Red Sea crisis

[Goofyhoofy]

@Divitias

That 2% goal may be harder to reach than Powell thinks:

Meebe. My theory is that we are already at, or astonishingly close to 2%, the math just hasn’t caught up yet. Looking at the 12-month number, there’s a lot of baggage where inflation popped, but looking at the 6 month number a lot of that early baggage has dropped off, and we are really close. Add in the “imputed rent” component, which accounts for 35% of the official statistic, and which is very much a lagging indicator, I’d hazard a guess that we’re at 2%, or microscopically close, plus or minus.

That is not to say there might be some bumps, particularly in times of war and sanctions, but overall the big story should be “Victory.”

[laffisloon]

@mostlylong

Another nuance is that when Powell says 2% inflation as a target, it’s not exactly clear which measure(s) he means

The Fed target is for PCE. CPI-U runs about 15% higher, with 2% PCE translating into 2.3% CPI-U.

“The Federal Open Market Committee (FOMC) judges that inflation of 2 percent over the longer run, as measured by the annual change in the price index for personal consumption expenditures, is most consistent with the Federal Reserve’s mandate for maximum employment and price stability.”

Why does the Federal Reserve aim for inflation of 2 percent over the longer run?

@mostlylong

Powell’s expectation is that the Fed would cut rates before inflation declines to their 2% target.

I agree. The September Summary of Economic Projections median projection was one Fed rate cut in 2024, and PCE at 2.5 in 4Q2024. The December median projection was 3 rate cuts in 2024, and PCE at 2.4 in 4Q2024.

as of November 2023:
2023 PCE inflation: 2.6
2023 Core PCE inflation: 3.2
2023 Federal funds rate: 5.4

Median projections in the September Summary of Economic Projections Table 1:
2024 PCE inflation: 2.5
2024 Core PCE inflation: 2.6
2024 Federal funds rate: 5.1

Median projections in the December Summary of Economic Projections Table 1:
2024 PCE inflation: 2.4
2024 Core PCE inflation: 2.4
2024 Federal funds rate: 4.6

These projections are percent changes from the fourth quarter of 2023 to the fourth quarter of 2024.

The Fed is balancing the risk of renewed inflation against the risk of recession. There are no signs of either, and so the Fed could just get out of the way, cut rates a little now, and see what happens in the economy. But if renewed inflation is the bigger risk, the Fed will keep the brakes on until the economy is at full stop, leading to a mild recession. If the Fed wants to be 100% sure of a landing, a hard landing is needed. If the Fed wants a chance of a soft landing, some preemptive rate cuts are needed.

[Leap1]

The economy will have a mild or nonexistent recession. That is the soft landing.

The markets might not get off so easily. Has nothing to do with the landing. Commercial real estate has problems.

[mostlylong]

@laffisloon

The Fed target is for PCE. CPI-U runs about 15% higher, with 2% PCE translating into 2.3% CPI-U.

“The Federal Open Market Committee (FOMC) judges that inflation of 2 percent over the longer run, as measured by the annual change in the price index for personal consumption expenditures, is most consistent with the Federal Reserve’s mandate for maximum employment and price stability.”

Thank you for this one, I was not aware that PCE inflation, trailing 12 months, was stated at this level of “officialness.”

[laffisloon]

The 2% target has been the announced Fed policy since 2012. Before 2012, the Fed target was clouded in mystery. The idea to have an announced inflation target started in New Zealand.

[mostlylong]

This,

@Goofyhoofy

“ Federal Reserve Chair Jerome Powell said at least two interest-rate increases are likely necessary this year to bring the inflation rate down to the US central bank’s 2% target and that acting at consecutive policy meetings isn’t “off the table.” (Bloomberg, June 2023).

just says two or more rate increases by end of 2023.

Here is the actual Powell quote from the Bloomberg article:

“A strong majority of committee participants expect that it will be appropriate to raise interest rates two or more times by the end of the year,” Powell said Thursday, referencing the policy-setting Federal Open Market Committee.

As already mentioned, I am looking for a quote or statement from the Fed or FOMC member that says something close to

@mostlylong

… inflation needs to get to a specific number (y%) before the Fed will take a specific action (raise, pause, cut).

which is what other posts claimed. For example,

@tjscott0

Powell never said he would stop after one more rate hike,. In fact he said rate hikes would continue until inflation is down to the 2% level.

and

@WendyBG

The Federal Reserve has said many times that it will not reduce the fed funds rate until inflation has declined to its target of 2% and stayed there for an extended period of time.

The Bloomberg article just says take some action (two or more rate cuts) when this condition is reached: the end of the year. “End of the year” is not the same condition as inflation reaching a specific percent.

The closest quote I have seen concerning inflation reaching a specific number (y%) before the Fed will take a specific action (raise, pause, cut) is this quote from the December 13 press conference:

CHAIR POWELL. I mean, the reason you wouldn’t wait to get to 2 percent [inflation reaching a specific number] to cut rates [specific action] is that policy would be, it would be too late. I mean you’d want to be reducing restriction on the economy well before 2 percent because – or before you get to 2 percent so you don’t overshoot,

[captainccs]

@mostlylong

As already mentioned, I am looking for a quote or statement from the Fed or FOMC member that says something close to

Alan Greenspan made it clear that the purpose of FedSpeak was to make sure no one understood it (or words to that effect, if I understood GreenSpeak in the first place).

The Captain

So in order to reduce unemployment and spur economic growth, the The Fed would need to prevent market participants from anticipating its monetary policies. It is widely understood that Greenspan’s Fed speak was intended to do exactly this. By employing deliberately vague and confusing language, he hoped to prevent market participants from anticipating monetary policy decisions.

Fed Speak: What It Means and how It Works.

[flyerboys]

@captainccs

the purpose of FedSpeak was to make sure no one understood it

Crucial knowledge. Parallel to the way parents talk about Santa Claus’s intentions, motivations, psychology, obsession with children being bad or good, awake or asleep, bottomless hunger for cookies or cola, and hypersonic reindeer.

d fb
(and it is a common mistake to think of either of them, however logically, as gods at some remove from the world…)

[laffisloon]

@captainccs

Alan Greenspan made it clear that the purpose of FedSpeak was to make sure no one understood it (or words to that effect, if I understood GreenSpeak in the first place).

FedSpeak was the 20th century policy. Fed policy now is transparency. The Wizard of Oz has opened the curtain.

=== links ===
The Evolution of Federal Reserve Transparency Under Greenspan and Bernanke, September 2013
“This paper traces the evolution of US central bank transparency and provides new evidence bearing on the question of whether the Fed has become more transparent in recent years. Before Alan Greenspan, who eventually became a grudging advocate of transparency, Federal Reserve Board chairmen typically prized secrecy over transparency. Ben Bernanke’s empirical research led him to conclude that transparency actually enhances the effectiveness of monetary policy. Our original empirical approach incorporates reaction functions in comparing how the FOMC responds to a set of macroeconomic stimuli vs. how the futures market responds to the same variables. The evidence suggests that the Fed was not very transparent in the early Greenspan years, but became progressively transparent through Greenspan’s later period and into the early, pre-crisis, Bernanke era.”
https://www.researchgate.net/publication/263324997_The_Evolution_of_Federal_Reserve_Transparency_Under_Greenspan_and_Bernanke

Why the Fed decided to be transparent, July 30, 2019
"There’s a good chance that when Federal Reserve Chair Jerome Powell takes the press conference podium after the Federal Open Market Committee meeting concludes tomorrow, he’ll announce a cut to the federal funds rate. We know this because Powell has told us as much in an effort to make the Fed more transparent. “I feel that we have an obligation to explain ourselves,” Powell said in an interview with Marketplace host Kai Ryssdal last year. “I think we’re shifting our focus a little bit to, you know, address the American people more generally and try to explain what we do, why we’re doing it and how we carry out the important jobs that Congress has given us.” But it wasn’t so long ago that the idea of a Fed trying to “explain” itself was blasphemy. Peter Conti-Brown, a professor and Fed historian at the Wharton School at the University of Pennsylvania, describes the Fed’s communication past as “a tortured history.” “I think of ‘The Wizard of Oz,‘” Conti-Brown said. “I think of the Fed trying to be the wizard to the citizens of Emerald City, but now trying to say, ‘Well, we should invite the visitors from Kansas behind the curtain.’” "

Why the Fed decided to be transparent - Marketplace