Even Jerome Powell is Having Trouble Reading This Economy
The Federal Reserve Chair’s last public comments before the next monetary policy decision in two weeks emphasized his extreme uncertainty about the longer-term outlook.
Fed Chair Jerome Powell during an interview at an Economic Club of New York event on Thursday.
Photographer: Bess Adler/Bloomberg via Getty Images
Federal Reserve Chair Jerome Powell just delivered his final remarks before the central bank’s next policy decision, the highlight of a busy month of central banker speeches before their blackout period begins. The public appearances have cemented the perception that the Fed will hold rates steady at its next meeting and probably through the end of the year.
As for next year, however, even Powell, the most powerful man in global finance, can’t pretend to know what’s in store. Here’s how he put it on Thursday in his prepared remarks at the Economic Club of New York, which were later followed by an on-stage interview with Bloomberg’s David Westin (emphasis mine):
In short, the longer-term path ahead is anyone’s guess. All we can do is focus on the near and present, so let’s start by doing just that.
At the time of writing, Fed funds futures imply just 2% odds of a Fed rate increase next month and about one-in-four odds of a hike at the year’s last meeting in December. Over the course of the past month, few policymakers1 have explicitly endorsed an imminent need for further rate increases. Working in favor of the doves was a string of relatively benign inflation data. On a three-month and six-month annualized basis, core personal consumption expenditures inflation — the Fed’s preferred gauge — is running at just about 2.2% and 3%, respectively2 — essentially within spitting distance of the Fed’s 2% target.
What would it take for officials to confidently arrive at the conclusion that a reacceleration is afoot? Inflation data can be erratic from month to month, and it’s subject to revisions. As a consequence, you’d need essentially all of the forthcoming inflation data published before the year’s final decision (two CPI and PCE reports) to be quite bad to meaningfully shift the six-month moving averages. To get the 6-month trendline moving up again on core PCE, you’d need, for example, at least one 0.4% month-on-month increase3. Could it happen? Sure, but the short calendar alone suggests it’s unlikely to transpire before the end of the year.