Dollar bills and US currency

Will the Real Jay Powell Please Stand Up, Please Stand Up

I’m confused. Powell and his cohorts at the Fed have expressed a steadfast commitment to getting inflation back to its 2% annual target.

Dollar bills and US currency

Some recent remarks from Jay Powell include:

“Inflation remains well above our longer-run goal of 2 percent.”

“Inflation pressures continue to run high, and the process of getting inflation back down to 2 percent has a long way to go.”

“The labor market remains very tight.”

“We remain committed to bringing inflation back down to our 2 percent goal.”

The rhetoric is strong, but is the bark worse than the bite?

We just had another blowout jobs report, and core inflation is stuck above 5%.

But the Fed passed on hiking rates in June, and the Fed is penciling in just 2 more 25 bp rate hikes this year—that’s two of four meetings. That sounds like the very gradual pace of rate hikes we saw in the 2010s when inflation was hovering just below 2%.

Is the Fed really committed to getting inflation back down?

Last year, they talked a big game, and they followed through, much to the chagrin of investors. This year, I’m not so sure. Maybe it’s simply the fear that anything more than a mild recession could be lurking.

A man looking at his watch

Hurry Up and Wait

Over the past six to twelve months, there has been significant coverage and talk regarding a looming recession.

A man looking at his watch

This level of attention from analysts, economists, and the financial media is unusual, as recessions typically catch us off guard. It’s only in hindsight that we recognize the signs that were hidden in broad daylight.

This time, however, it’s hurry up and wait… and wait and wait. Last week’s payroll report highlights that we’re still waiting.

Yet, the Fed is on board with a mild recession. It sees one developing later in the year.

The job market is flourishing, and inflation is more than double the Fed’s annual 2% target. However, central bankers are considering forgoing a rate hike next week in order to assess the impact of 10 straight rate hikes, which have raised the fed funds rate from zero to 5%.

The current series of rate increases is the sharpest since 1980. But even with a 5% fed funds rate, it’s not at a historically high level, particularly with inflation hovering around 5%.

Essentially, this means that the real fed funds rate is zero, and it doesn’t appear to be restrictive, given today’s still-high rate of inflation.