On the one hand, Powell’s talk this afternoon was quite bland.1 Repeated the SEP macro and rate projections without adding much color. But the story of the outlook and monetary policy this year is anything but bland: The economy is projected to grow well above the trend this year, the unemployment rate is projected to fall far below the NAIRU, and inflation pressures are building. The March dots tell us how appropriate policy is evolving, toward faster and further rate hikes. Of course, that is a more provocative story, and Powell would likely not have been happy with the sell-off in the bond market if he had told it that way. But participants are gradually adjusting the picture they are painting of the economy and where it is headed.
Most of the discussion of the labor market and inflation was about the past and where we are now, rather than where we are expected to be going. And the key to rate decisions today is the forecast. It’s the change in the forecast that resulted in the higher path of the fund’s rate in the March dots, not the incoming data. Where we now do not present many challenges, but where we are projected to go does.
He describes the FOMC as performing a balancing act: fast enough to avoid a rise in inflation to unwelcome levels, which would prompt a more abrupt tightening and possibly trigger a recession; slow enough to ensure inflation returns to the 2% objective. Wouldn’t we characterize monetary policy as performing a balancing act during any recovery? The story today is that the balance of risks has changed, especially with the badly timed pro-cyclical fiscal stimulus, to greater concern about overheating. This makes it a really hard task to achieve a soft landing.
One of Powell’s key focuses was the labor market. He said the unemployment rate was “arguably the best single indicator of labor market conditions,” and then discussed a range of other indicators that also pointed to tightness in the labor market, including U-5 and U-6 measures of the unemployment rate and various flow measures of labor market conditions. For example, the job vacancy rate is near an all-time high. He then went on, as he has before, to discuss the possibility of remaining slack: “While the data I have discussed thus far do point to a tight labor market, other data are less definitive.” He pointed to data suggesting that “the strong job market does appear to be drawing back some people who have been out of the labor force for a significant time.” He also noted that “the absence of a sharper acceleration in wages suggests that the labor market is not excessively tight.” He concluded: “While uncertainty around the long-run level of these indicators is substantial, many of them suggest a labor market that is in the neighborhood of maximum employment. A few other measures continue to suggest some remaining slack.” This even-handed discussion of the labor market was in line with his previous remarks. What is dovish about this discussion was the glaring omission of a discussion of the trajectory of the labor market—to well past “maximum employment.”
He also discussed inflation, though in less depth than the labor market. He said he still sees the Phillips curve relationship as persisting, though with a weaker relationship between slack and inflation, adding, “I believe it continues to be meaningful for monetary policy.” Let’s hope so because this is the only game in town with
1 Powell, Jerome H. “The Outlook for the U.S. Economy” at The Economic Club of Chicago, Chicago, Illinois, April 6, 2018.
respect to determining the underlying rate of inflation, and, without it, monetary policymakers are basically out of business!
He described the FOMC’s approach as “patient,” which seemed to be a dovish word choice. He also referred to the pace of hikes as gradual—a better description, especially since Dudley reminded us that gradual is consistent with four moves this year. They are moving in the direction of faster and further, a faster pace, and a rise in the fund’s rate beyond its neutral level.