Fed To Keep Pushing Until Inflation Comes Down: Key Takeaways From Powell’s Interview

While Powell did not say anything groundbreaking, here are the key takeaways from the Fed chair’s remarks at the Wall Street Journal event, courtesy of Bloomberg:

• Powell made some of the most forceful and hawkish comments we’ve heard from him yet. He repeatedly said the Fed is going to get inflation back down to its 2% goal and won’t stop until there’s “clear and convincing” evidence it’s coming down.
• He dismissed the notion of policy makers stopping and looking around once the fed funds rate reaches neutral, which most estimates put at 2.5% and officials have said they want to reach by the end of the year. Powell said the Fed “won’t hesitate” to hike above the neutral rate if needed.
• Powell said that the natural rate of unemployment is likely closer to 5% than the current 3.6%. He’d like to see a labor market that’s more in balance, but there could be “some pain” involved in restoring price stability.
• Powell said several times that there are still a lot of issues within the supply chain, which have been exacerbated by the Russian invasion of Ukraine and the lockdowns in China. Those problems continue to weigh on inflation, but the Fed can’t be concerned with where inflation is coming from, it just has to focus on bringing it down.
• Two-year yields — which Powell said were a pretty good gauge of Fed policy expectations — hit their high of the session during the talk, and were at 2.69% as of 2:42 p.m. in New York. The S&P 500 was trading at roughly the same levels at the end of the conversation as it was prior to its start — up 1.5%. The Nasdaq 100 was up 1.9%.

A quicker, and perhaps even more accurate read comes from Knowledge Vital which writes that the Fed “is happy with the present state of market expectations,” and “we struggle to really find anything that incremental in [Powell’s] remarks. .. investors need to stop looking for monetary ghosts .. and reacting to what are simply reiterations ..”

Stocks should stop chasing Fed ghosts https://t.co/TdO1Z1m70E

— Vital Knowledge Media (@knowledge_vital) May 17, 2022

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Fed Chair Jay Powell joins WSJ’s Nick Timiraos (for 35 minutes) to discuss rising interest rates, the Fed’s plan to address high inflation and the outlook for the U.S. economy and labor market, at the WSJ Future of Everything Festival.

The market will be listening for any signs of Powell chickening-out – like he did in late 2018 after the equity market successfully called his bluff on Fed hawkishness – and any indications of a shift back to belief in ‘transitory’ inflation.

Will Powell reiterate his commitment to fighting inflation no matter what…

"…the process of getting inflation down to 2% will also include some pain, but ultimately the most painful thing would be if we were to fail to deal with it and inflation were to get entrenched in the economy at high levels, and we know what that’s like."

…

"Five words or less. I’m gonna go with what I really am thinking is, ‘get inflation back under control’…"

Will he put 75bps back on the table?

"If things come in better than we expect, then we’re prepared to do less, if they come in worse than when we expect, then we’re prepared to do more."

Will he admit that a ‘soft landing’ is more luck than skill?

"So the question whether we can execute a soft landing or not, it may actually depend on factors that we don’t control."

As a reminder, Powell recently noted that he admires Paul Volcker, noting that:

"…[Volcker] did what he thought the right thing was, and he was prepared to be unpopular for that, because he was looking at the medium and longer term, well, for the country. And I don’t have any, you know, I think that’s a good thing to keep in mind as you do public service jobs."

In recent week since the last FOMC meeting, US Macro data has significantly surprised to the downside…

And financial conditions have already tightened significantly…

Watch Live here (due to start at 1400ET):