By Robert Eisenbeis, Ph.D.
As expected, the FOMC raised the target range for the federal funds rate by 25 basis points to 4.5%–4.75%. The Committee’s statement was virtually identical to that released in December, except for elimination of references to “…supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.” The statement leaves the impression that further increases are envisioned and will be dependent upon incoming data and assessment of progress towards the Committee’s 2% target. The press conference following the meeting was equally uninformative, as the press focused its attention on possible future policy moves.
Chairman Powell focused on the Committee’s commitment to getting inflation down to its 2% target and pushed back on any questions about when a pause might be in order, calling them premature. It should be noted, however, that two more 25-basis-point increases in the target range would bring the Committee’s range to 5.0%–5.25%, which some Committee members believe would be the appropriate stopping point. Powell did say that whenever the Committee did stop, the range might be in place for some time.
Powell was questioned on whether the tight labor market meant that a recession might be necessary to bring inflation down. That question reflected the underlying Phillips curve view that there is a tradeoff between employment (unemployment) and inflation, and that inflation is a real-side phenomenon. Powell responded that he was pleased to see that the inflation rate had come down without hurting labor markets.
When asked about whether events since the December meeting had changed the Committee’s view of the appropriate path for rate increases, as revealed in the SEPs (Summary of Economic Projections), Powell dodged the question by saying that the SEPs had not been updated and this issue would be addressed at the next meeting. This response was disingenuous, because we know that the Fed staff and reserve bank staffs update their projections as part of the preparation of their principals for each FOMC meeting, and it is simply not believable that there was no discussion of the path for future rates as part of those preparations. Indeed, in response to a later question as to whether it might now be time to pause rate increases, Powell stated that they had spent a lot of time discussing the path forward, and presumably that meant the path for rates. These kinds of questions would be more easily addressed if the Committee were to provide SEPs at each meeting, and transparency would be enhanced if the SEPs were quarterly rather than yearly. This practice would better highlight differences among Committee participants’ views about the path for policy. Of course, this level of clarity could prove uncomfortable should those expectations not be realized.
One press representative turned the discussion to the debt ceiling and asked whether the Fed, as fiscal agent for the Treasury, would do what the Treasury states, or whether it would conduct its own legal analysis of the situation. Powell emphatically stated that the only course of action was for the Congress to increase the debt ceiling and that the risks of not doing so were too great. Moreover, it would not be possible for the Fed to mitigate the consequences should the Congress fail to raise the debt ceiling.
Powell was then questioned on how much additional slowing of the economy would be necessary to bring inflation down and whether a recession was likely, as many of the leading indicators have suggested. He indicated that, at present, his view is that we will see subdued growth in 2023, a softening in the labor market, and slower inflation but no recession. He also said that at this time he did not foresee a cut in rates in 2023.
A last thought concerns the timing of the meeting. Two days after the FOMC meeting, the BLS released its jobs report for January 2023. Markets and forecasters had expected a number lower than the 223K job gains that were reported in its December release. Economists were expecting a decline to 185K in January, but the data released by BLS showed instead that a striking 517K new jobs were created. We wonder whether the FOMC’s policy decisions might have been different had that surprising information been in hand before the meeting. Most certainly, the tenor of the discussion at the post-meeting press conference would have been different, as would market reactions. It would seem logical that the Committee, in addition to providing SEP projections at each meeting and perhaps providing quarterly numbers, should not schedule its meetings to take place in advance of the release of key economic data like employment, GDP, and inflation that could be relevant to the Committee’s decisions. The FOMC gathering for January/February 2023, for example, should have been scheduled for next week rather than on January 31 and February 1.
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