The Fed made an important tweak to its monetary policy statement 📝
A hawkish tone, but a clarification that suggests the bank won't overshoot 🦅
For the most part, Wednesday’s message from the Fed and Chair Jerome Powell was consistent with what they’ve been saying for months — that they will keep monetary policy tight until they get compelling evidence that inflation is coming down.
"At some point... it will become prudent to slow the pace of [interest rate] increases,“ Powell said during a Q&A with reporters. “There is significant uncertainty around that level of interest rates. Even so, we still have some ways to go."
The hawkish tone seemed pretty deliberate on Powell’s part. He had multiple opportunities to dial back his language, but he maintained that the battle with inflation was far from over.
“What I'm trying to do is make sure our message is clear, which is we think we have a ways to go,” he said. “We have some ground to cover with interest rates before we get to that level of interest rates we think are sufficiently restrictive.“
“There's no sense that inflation is coming down,“ he said. “We're exactly where we were a year ago.“
An important tweak to the official statement 📝
There was a sentence added to the Fed’s latest policy statement that caught the attention of Fed watchers.
…In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.
This is important: While many experts have argued that the Fed is well aware of lags in economic data and lagged effects of monetary policy, at least some folks had raised concerns that by relying on reported data, the Fed was essentially conducting monetary policy through a “rearview mirror.”
By acknowledging that it recognizes these lags, the Fed is alleviating some concerns it would overshoot with monetary policy and cause more pain than necessary in the economy.
That said, Powell reiterated the central bank’s commitment to make sure inflation was under control, even if it involved overshooting.
"If we were to over-tighten, we could then use our tools strongly to support the economy,” he said. “Whereas if we don't get inflation under control because we don't tighten enough, now we're in a situation where inflation will become entrenched."
The bottom line
Inflation remains far too hot. So the Fed will continue to aggressively tighten monetary policy until it’s convinced inflation is clearly on its way down. That means even more pain for the economy with a growing risk of recession. And because the Fed’s primary channel for fighting inflation is by tightening financial conditions, we should all continue to brace for more volatility in the markets.
Here’s the full text of the Fed’s policy statement:
Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.
Russia's war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3-3/4 to 4 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lael Brainard; James Bullard; Susan M. Collins; Lisa D. Cook; Esther L. George; Philip N. Jefferson; Loretta J. Mester; and Christopher J. Waller.