November 30, Fed Chairman Jerome Powell spoke to the Washington D.C.-based Brookings Institute Hutchins Center on Fiscal and Monetary Policy about the economic outlook, inflation, and the labor market. Chairman Powell delivered a prepared speech and then took questions. A quote around the 16th minute sums up the tone of the speech, "Ongoing rate hikes are appropriate to attain a policy stance that is sufficiently restrictive to move inflation down to 2% over time." Watch the entire presentation here.
· Core inflation is essentially the same as in December 2021, when tightening began.
· The Fed will continue raising rates until “below trend growth” is sustained for an extended period.
· Wage growth is higher than would be consistent with 2% inflation
· The Fed firmly committed to “stay the course” until inflation holds at 2%.
Chairman Powell began his speech by stating he would give a progress report on the FOMC’s efforts to restore price stability “for the benefit of the American people.” His report acknowledged that inflation is too high, “exposing families to significant hardship, straining budgets, and shrinking what paychecks will buy.” Powell immediately transitioned to his familiar opening phrase, “price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy.
The first point Powell spoke about was core inflation. The October numbers were less than expected, but the two previous months were more than expected. He appreciated October's numbers, but it will take significantly more data to confirm that inflation is declining. Powell stated that core inflation has been moving sideways and near the same as in December 2021, when tightening was in the early stages. Powell transitioned by asking, “when will inflation come down?”. He rebuked the market analysts who predict inflation will come down in about a year. He said the forecasters have already been predicting such a decline for a year while inflation is moving stubbornly sideways. “The truth is the path ahead for inflation remains highly uncertain.”
Instead of being an arbitrary date, Powell listed four economic conditions necessary to bring inflation down to the 2% goal.
1. Economic growth has slowed well below its longer trend growth, which needs to be sustained for an extended period.
2. Supply bottlenecks, goods production, and good prices need to ease for an extended period.
3. Housing services inflation needs to fall significantly from current levels.
4. The labor market and wage growth must be consistent with 2% inflation. The current wage growth is too high and inconsistent with a 2% inflation target.
Translating the four economic factors to plain English:
1. Below trend growth is political speech for a recession. The first economic condition is an extended recession. The traditional definition of a recession is two-quarters of negative GDP. Two quarters would be six months. It isn't clear what an "extended period" means. Still, a recession lasting only six months would be the minimum qualification of a recession and probably not described as extended.
2. The prices of goods need to decrease, and supply chain problems need solutions. The Fed does not have the tools to stop the Ukraine war, the European energy crisis, or the Chinese Covid lockdowns. The tools of the Fed work primarily on aggregate demand but cannot affect supply chain issues or solve supply bottlenecks. (This condition is a conundrum for the Fed and the idea the Fed hopes the media doesn't pick up on. The Administration and the Fed have repeatedly blamed the Russian invasion of Ukraine and Covid for the high inflation. There are two options. The Fed agrees it is their loose policies and excessive printing that caused inflation, or they are intentionally taking destructive actions unable to affect supply chain inflation.)
3. Housing service inflation is inflation connected to home prices, rents, and services connected to rents. Housing service inflation lags other types of inflation indicators because leases don’t tend to turn over every month. Leases usually last several months to years. Housing/rents need to come down, and tenants must sign leases at significantly lower prices to satisfy this requirement. It could be at least a year before this metric is even measurable.
4. There are too many jobs, and employers are paying too much to have 2% inflation.
Translating the translation:
The Fed can't control Russia and China. Still, it intends to create a recession, collapse housing, and destroy the labor market to bring down inflation.
Powell stated about the economy, “so despite some promising developments, we still have a long way to go in restoring price stability…My FOMC colleagues and I are strongly committed to restoring price stability…Ongoing rate hikes are appropriate to attain a policy stance that is sufficiently restrictive to move inflation down to 2%.”
Powell concluded his speech with a very ominous warning that strangely sounded positive until you think about what he was saying. “The full effects of our rapid tightening so far are yet to be felt; thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down…history cautions strongly against prematurely loosening policy, and I will close by saying, we will stay the course until the job is done.”
What does he mean by “the full effects of our rapid tightening so far are yet to be felt?” Keep in mind that slower does not mean lower. Since the Fed started raising rates in March, stock and bond markets are down double digits. According to Powell, the economy needs ongoing rate hikes, and there is still unrealized downward pressure on asset values from interest rate hikes already instituted. Within 24 hours of Powell's speech, the price of gold climbed by nearly $80. Are you sure you want to keep your wealth in the banks and paper markets?
Call the U.S. Gold Bureau today.