FOMC Statement and Powell’s Press Conference – Currency Thoughts
FOMC Statement and Powell’s Press Conference
July 31, 2024
Today’s FOMC statement modified the prior statement of June 12 in two notable ways. First, labor market conditions depict less tightness, with job gains that were previously seen as strong being depicted now as having moderated and with the jobless rate still low but having moved up lately. Second and even more noteworthy, the last sentence in the second paragraph that for a long time said “the Committee remains highly attentive to inflation risks” now reads “is attentive to the risks to both sides of the dual mandate.” This replaced language is a predictable verbal signal that needed to precede the first rate cut and presumably puts the possibility of a cut on the table as early as the September meeting. Today’s decision was agreed upon by all twelve voting members of the Fed’s Open Market Committee.
Revelations during Chairman Powell’s press conference were not particularly surprising. A significant majority of the 19 FOMC members favored not cutting the 5.25-5.50% federal funds target just yet, but there was considerable sentiment that the time for an initial rate reduction is fast approaching. Powell indicated that labor market conditions are now back to ones similar to late-2019, just before the Covid outbreak and a time when inflation was aligned with the Fed’s 2% target. Inflation receded quite rapidly in 2023, then had a three-month upward hiccup in the first quarter of 2024, but now there are three months of ensuing reduction in inflation. Moreover, the drop in inflation during 2023 was much more narrowly balanced (i.e., concentrated among goods), than what’s being observed now. His message seems to be that that labor markets really don’t need to cool in a more accelerated fashion for the committee to become sufficiently confident in an initial rate cut. The main sticking point against cutting the rate today is that not enough time since the first quarter setback in inflation data has passed. If the coming inflation reports between now and the September meeting don’t show a significant counter-move like that in the first quarter, he all but implied that confidence then will be sufficient to lower the rate.
Many of the questions to Chairman Powell tried to unveil more nuance into how a concept as vague as confidence translates into a decision on whether to cut rates or delay the decision at least until the next meeting. The Fed has never hidden the fact that decisions are made meeting to meeting based on all available information and, more broadly, on the fact that monetary policy and economic forecasting for that matter is a judgmental process. The journalists seemed more comfortable with a process that would be dictated by a black box, namely a set of equations. I would be very concerned to see such a system adopted. The 1970’s, a period when U.S. inflation exploded upward in a series of big waves, was also a time when the economics profession fell in love with complex econometric models to explain the macroeconomic behavior of big economies. As forecasting tools, such efforts came up woefully short. With the world’s rapid development of artificial intelligence, the time may come when governments are tempted to bequeath complex and difficult decisions, like the conduct of monetary policy or whether to use weapons of mass destruction, to machines. Hopefully that doesn’t happen. This isn’t a matter of letting robots call balls and strikes, which can be done more accurately than by human umpires, and the stakes are considerably higher.
Copyright 2024, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: FOMC statement and press conference
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