In the spirit of ESPN’s Monday Night Countdown, a word to Federal Reserve Chairman, Jay Powell … “C’Mon Man!” While the markets have rebounded nicely on Thursday, it seems to me that Federal Reserve chair Jay Powell unnecessarily complicated the outlook for interest rate policy on Wednesday by saying the Fed will decide, meeting by meeting, what to do next. It would have been much clearer had he said that the Fed believes that the rate of inflation has slowed to the point where the Fed can now comfortably and safely begin the process of normalizing interest rates, on a regular and consistent basis. The caveat that the Fed does not have a pre-set agenda to bring rates down to what economists consider normal levels was the likely culprit in the market’s late-day sell-off on Wednesday, although the market appears to be quickly shrugging off those comments, as of Thursday anyway. Meanwhile, long-term interest rates, after having fallen for weeks in anticipation of a half-point cut, which the Fed delivered, have actually moved up a bit. Lack of clear direction Why? I’m not entirely certain but I suspect it’s the lack of clear direction on future rate policy that is the culprit. Of course, most observers do believe, and the Fed’s own internal projections show, that rates are going to be coming down over the course of the next 15 months, on a consistent basis. The Fed’s so-called “dot plot” and summary of economic projections (SEP), show the Fed expects short-term interest rates to land somewhere between 3-4% by the end of next year. So why not state that emphatically and with some degree of glee? Given the experiences of the mid-1970s, when the Fed lowered rates amid concerns about an impending slowdown, only to have inflation shoot higher again, this Fed has been extremely reluctant to claim victory over inflation. But this is, decidedly, not the 1970s. The risk of inflation reaccelerating appears quite small, given the persistent decline in commodity prices, weakening economies around the world, deflation being exported from China and a host of other factors that will likely keep inflation in check for some time to come. So the Fed should stop worrying about repeating the mistakes of the past. Fed reluctance But to retain its necessary credibility as an inflation fighter, the Fed appears reluctant to make such a bold statement. With Chair Powell saying that the Fed’s preferred measure of inflation has dropped to a rate of 2.2%, the Fed has, thus far, fulfilled its mandate to return price stability to the economy and is right to focus, now, on the other half of its statutory mandate, maintaining maximum sustainable employment. The Fed chair could be as emphatic about that now as he was in bringing inflation to heel. Years ago, there was a book written about the Fed entitled, ” The Secrets of the Temple ,” which was a conspiratorial tome about the opaque nature of Fed deliberations in the Paul Volcker era. In those days, the Fed was loathe to discuss its actions publicly and only signaled to markets what it had done with respect to interest rate policy a considerable time after the action was undertaken. Thus it was viewed as not only secretive but somewhat unaccountable for its actions. Today, the Fed is extremely transparent and often taken to task by members of Congress and other political players. Having said that, its deliberations remain frustratingly vague and its communications unnecessarily two-sided. Why maintain a fiction that the Fed doesn’t know what its next move will be when its own published work tells us what’s coming? Keeping the markets guessing is not a recipe for policy success, nor does it alter what we all think we know is coming — lower rates for a longer time. Just admit it folks. You won the war on inflation. It’s good news for everyone. C’Mon Man!
