Powell did an excellent job on the opening statement and responses to reporters, with relatively short and crisp answers. Very clear, very careful. No missteps. A shorter press conference than typical with Yellen, and more succinct answers. Not that he looked like he had someplace he needed to get to. This is just Powell’s style.
He showed particular fluency, as we expected, on topics of financial stability and asset pricing. He has played a leading role in regulation, so these topics are in his home territory. It showed.
Very clear answers on topics related to political independence and very careful answers with respect to policies outside the Fed’s mandate, specifically on trade policy. He deflected questions on certain topics.
We would have preferred a more comprehensive response to questions on the symmetric inflation objective— we thought this was somewhat of a missed opportunity.
In what follows, italicized portions are our interpretation of what Powell said.
Longer-term operating procedure: Haven’t made a decision and do not expect one in the near term.
Does paying interest on reserves to subsidize banks? Politically sensitive issue. Sharp answer: No! The Fed pays less than the market rates they could otherwise receive. And it doesn’t cost taxpayers because higher interest payments as a result of having larger liabilities on the balance sheet are more than offset by higher interest earned on the corresponding larger assets on the balance sheet.
Overshoot of r-star in 2020: This was a good question in our view because it touches on the potential risks of raising the fund’s rate faster and further. He said the neutral rate might move up because of fiscal stimulus. But you’re asking about what might happen in 2020? Who knows what will happen by then.
Inverted yield curve: His answer could have been sharper here. He could have noted that we are more likely to have an inverted curve today than in earlier periods because the term premium is so low. As a result, an inverted yield curve does not carry as powerful a signal as before.
Meaning of a symmetric inflation objective: We thought this was a missed opportunity to explain that a symmetric inflation objective allows for a modest and temporary overshoot of the inflation objective, as seen in the current macro projections, given that inflation routinely undershoots during downturns, as it did following the most recent recession.
Some questions on trade policy: First, discussions of potential trade policy initiatives have not affected participants’ macro outlooks. Second, Reserve Bank presidents indicate that trade policy has become a
concern for business leaders, which is a risk to the outlook. Third, the Committee didn’t talk about potential effects on the global economy or inflation if there is retaliation. Deflection!
Dismissive of the dots and macro projections: Yes, a bit dismissive, at least of the medians. Powell kept emphasizing that the only decision at this meeting was to raise the fund’s rate target 25 basis points. In his view, the dots and macro projections are merely a compilation of individual projections and reflect a diversity of views: “The Committee doesn’t vote or agree upon the medians.” Perhaps not directly. Bernanke and Yellen, while occasionally dismissive, always linked changes in the dot plot to changes in the macro projections, explaining why participants became more or less hawkish at one meeting relative to the last. Powell did not do that. Instead, he said: Why would anyone look at macro and rate projections for 2020? Too far out to pay attention to. Policymakers have no idea that far out. In our view, that answer could’ve been better. The public wants to know to what level they think the funds rate is going and how fast. In combination with the macro projections, this reveals something about their reaction function. A projected funds rate above its neutral level has important implications for the sustainability of the expansion and highlights the challenge they are facing.
Press conferences after every meeting: He seems open to it. He is thinking about it carefully. Consistent with our expectation that, someday, the FOMC will likely move to what has become the norm for other central banks. But not soon, perhaps later this year or even later. He appeared concerned that the market could interpret a greater frequency as signaling a greater likelihood of a faster pace of rate hikes.
Wage inflation: Wage increases have been only “modest” since unemployment began to decline, and that’s been somewhat surprising. But productivity growth has also been low. Because there are multiple sources of evidence that the labor market has tightened, he said, “I don’t think I have to see a more meaningful upward move in wages.”
Political pressure: Forget it. Not losing any sleep over the possibility. The Fed is an independent central bank. We will pursue our mandate. Period.
Supply and demand: There were a couple of questions about his views on how much of an effect the tax legislation would have on potential growth. He was very comfortable in responding that there will be a meaningful effect on demand and that there will be a smaller, later, and less-certain effect on supply. But he emphasized several times why supply-side effects were likely: Expensing and corporate tax cuts should boost investment, which, in turn, would raise productivity. Cuts in personal tax rates could increase labor force participation, “in theory.”
Asset prices and financial stability risks: “In some areas asset prices are elevated relative to their longer-run historical norms. You can think of some equity prices, you can think of commercial real estate prices in certain markets. But we don’t see it in housing, which is key. Overall, if you put all of that into a pie what you have is moderate vulnerabilities in our view” (bolding our emphasis).
Is talking about tax cuts bringing growth to 3% oversold, given that the median projections aren’t at 3% in any year? First of all, the SEP is a compilation of individual projections, which reflect a range of views. But 3% is well above almost all current estimates of potential growth. Would take significant increases in productivity and labor force participation to get there.
Are you beginning to question whether you are really overshooting full employment? Oh, a Phillips curve question. Not a strong defense. He is mindful that the natural rate of unemployment is unobservable and uncertain. But he also pointed to the FOMC continuously revising down its estimates in response to the data. As for right now, “there is no sense in the data that we are on the cusp of an acceleration of inflation.” But “we have seen moderate increases in wages and price inflation, and we seem to be seeing more of that.”
Might you adjust balance sheet policy in light of increased borrowing requirements by the Treasury: No!
Can you tell us anything about the staff forecast? No! The buck stops with the FOMC. Staff (and Reserve Bank staff) forecasts inform policymakers’ judgments, but the macro projections in the SEP are made by the policymakers themselves and those projections are the only ones that matter.
What are the chances of four hikes this year? Look at the rate projections. They can change with changes in the outlook. That’s all I have to say.