MNI INTERVIEW: Powell Nods To Fed Pause But Keeps Options Open
Financial markets complicate an already rocky inflation path.
Federal Reserve Chair Jerome Powell deftly balanced raising interest rates despite strains in the banking sector while sticking to a hawkish enough message that keeps open the possibility of additional monetary tightening if inflation proves stubborn, former Fed Board senior researcher Daniel Sichel told MNI.
Keeping tightening language is important to provide confidence after the SVB and Credit Suisse breakdowns, but so is providing a sense Powell can address market strains with tools outside the policy rate, which the FOMC accomplished by significantly softening its forward guidance, Sichel said.
“With the slight change in the language, it’s not quite promising more increases in the future but leaving the possibility of more increases in the future open while also leaving open the possibility of a pause or whatever depending on how financial conditions evolve,” said Sichel. He teaches at Wellesley College in Massachusetts and also used to work at the U.S. Treasury.
The Fed raised its key rate a quarter point to 4.75%-5% Wednesday and said "some additional policy firming may be appropriate," a shift from prior statements that stated "ongoing increases in the target range will be appropriate." The dot plot also retained a view the fed funds rate would reach 5.1% by year-end and slightly raised the inflation forecast.
IF NOTHING ELSE BREAKS
“They are definitely signaling they are very much on that case for inflation, and they still see a path to needing do to more like today to get there," Sichel said, even if dot plots are "less useful" than normal because of the wider range of outcomes.
“If nothing else breaks in financial markets, if the economy gradually slows and inflation is edging down, then I think that story of one more hike, that’s a reasonable guess as to what they might do. But there’s so many other paths that financial markets or the economy could take,” he said.
The Fed Chair told reporters there was discussion of a rate pause this week but “rate cuts are not in our base case” and tighter credit conditions could end up doing some of the central bank's tightening work for it. (See: MNI FED WATCH: Credit Tightening Caps FOMC's Terminal Rate)
Powell also told reporters the path of slowing inflation will be "bumpy," which Sichel said is another swish at telling investors the risks are two-sided.
GOOD MARKS
"SVB broke but things can break on the real side of the economy too. If the economy were either to tip into a recession or close to a recession, that could also lead to some nonlinear declines in inflation,” Sichel said.
At the same time, the Fed must be open to the possibility that price pressures will prove sticky even in the face of a possible credit crunch, which the FOMC flagged as a potential consequence of the recent banking crisis. (See MNI INTERVIEW: Credit Crunch Looms On Bank Runs-Ex-Fed's Stein)
“He’s also trying to communicate that on the other side, inflation may be pretty persistent and may require a decent period of time of higher rates, and growth at a slower rate to ease pressure.”
The Fed is also trying to separate financial stability matters from monetary policy, thus far successfully.
“I actually give him pretty good marks for the last couple of weeks,” Sichel said. “Powell and Yellen did a pretty remarkable job over that weekend to figure out what tools to use, and how to communicate about those tools, to prevent what could have been a pretty widespread banking panic.”