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Tag: Powell

  • Fed’s Powell spoke with prankster posing as Ukraine’s Zelenskyy

    Fed’s Powell spoke with prankster posing as Ukraine’s Zelenskyy

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    An alleged video of Fed Chair Jerome Powell’s conversation was shown on Russian state television and reported by Bloomberg News. | (Francis Chung/POLITICO

    Federal Reserve Chair Jerome Powell spoke on the phone early this year with someone posing as Ukrainian President Volodymyr Zelenskyy, the Fed confirmed — an embarrassing episode for the central bank chief.

    An alleged video of Powell’s conversation was shown on Russian state television and reported by Bloomberg News. The Fed said the footage appears to have been edited and therefore could not confirm its accuracy.

    “Chair Powell participated in a conversation in January with someone who misrepresented himself as the Ukrainian president,” a Fed spokesperson said in a statement. “It was a friendly conversation and took place in a context of our standing in support of the Ukrainian people in this challenging time. No sensitive or confidential information was discussed.”

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    ( With inputs from : www.politico.com )

  • Yellen, Powell welcome Swiss bank deal as step toward market stability

    Yellen, Powell welcome Swiss bank deal as step toward market stability

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    UBS said in a statement that it would pay the equivalent of $3.25 billion to buy Credit Suisse, in what will be a merger of two institutions considered important to the global financial system.

    “With the takeover of Credit Suisse by UBS, a solution has been found to secure financial stability and protect the Swiss economy in this exceptional situation,” the Swiss National Bank said in its statement. It added that the deal was made possible with the support of the Swiss federal government, the Swiss Financial Market Supervisory Authority FINMA and the Swiss National Bank.

    The Fed later also announced it would take steps to make it easier for five foreign central banks to exchange their currencies for dollars. The move, coordinated with the other central; banks including the European Central Bank, is aimed at easing strains in global funding markets.

    Starting Monday, those currency swaps will happen daily rather than weekly.

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    ( With inputs from : www.politico.com )

  • Interest rates likely to go higher than Fed previously anticipated: Powell

    Interest rates likely to go higher than Fed previously anticipated: Powell

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    Washington: US Federal Reserve Chairman Jerome Powell stressed on Tuesday that central bank policymakers are prepared to raise interest rates higher than previously expected and pick up the pace of increases in the face of hotter-than-expected economic data, according to a media report.

    “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Powell said in remarks prepared for delivery before the Senate Banking Committee, Fox Business reported.

    “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” he said.

    Central bankers are in the midst of the most aggressive campaign since the 1980s to crush persistently high inflation. Although the consumer price index has slowly fallen from a high of 9.1 per cent notched in June, it remains three times higher than the pre-pandemic average, Fox Business reported.

    The Fed’s rate-setting committee meets later this month.

    Markets widely expect the Fed to continue raising rates at a quarter-point pace, but a slew of hotter-than-expected economic data reports in recent weeks including the blowout January jobs report and disappointing inflation data that pointed to the pervasiveness of high consumer prices has raised the specter of a higher peak rate or steeper increases, Fox Business reported.

    The Labour Department reported in February that the consumer price index rose 0.5 per cent in January, the most in three months. The annual inflation rate also surprised to the upside at 6.4 per cent.

    “We will continue to make our decisions meeting by meeting,” Powell said, adding, “Although inflation has been moderating in recent months, the process of getting inflation back down to 2 per cent has a long way to go and is likely to be bumpy.”

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    ( With inputs from www.siasat.com )

  • How the Fed’s Powell answered 3 big questions about jobs

    How the Fed’s Powell answered 3 big questions about jobs

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    Fed officials had already estimated that unemployment could rise more than 1 percentage point — which could equate to about 2 million lost jobs — and they may update those projections at their next meeting this month. Friday’s jobs report for February will offer further clarity on a labor market that has shown stunning growth even in the face of higher rates.

    Powell suggested that he’s still holding out hope that joblessness won’t have to rise significantly, but he also made it clear that fighting inflation is his top priority. The unemployment rate — a more than 50-year-low of 3.4 percent — may not be sustainable without further stoking price spikes, he indicated.

    “We’re very far from our price stability mandate and, in effect, the economy is past most estimates of maximum employment,” he told the committee in his semiannual testimony. Still, he said, inflation has been fed by unprecedented factors related to the pandemic that, as they fade, might aid the central bank.

    Here are some key exchanges between the Fed chair and lawmakers:

    Sen. John Kennedy (R-La.): “You’re trying to raise the unemployment rate, are you not?”

    Powell: “No, we’re not — we’re trying to realign supply and demand, which could happen through a bunch of channels, like for example, just job openings.”

    While Powell flatly denied that his goal was to see unemployment increase, he acknowledged that the Fed does want to see the labor market weaken. Those might seem contradictory, but the thinking is that if there are fewer open jobs, it will help cool wage gains, which feed inflation, without necessarily causing a rise in joblessness.

    For the record, Kennedy was driving at a separate but related point: It’s a good idea, in his mind, to cut government spending to help reduce inflation because the Fed’s tools are much blunter and potentially more painful to the labor market.

    Many Republicans have been pressing for spending cuts as a condition for agreeing to raise the government’s borrowing limit this year.

    Sen. Elizabeth Warren (D-Mass.): “Chair Powell, if you could speak directly to the 2 million hardworking people who have decent jobs today who you’re planning to get fired over the next year, what would you say to them? How would you explain your view that they need to lose their jobs?”

    Powell: “I would explain to people more broadly that inflation is extremely high, and it’s hurting the working people of this country badly — all of them. Not just 2 million, but all of them are suffering under high inflation, and we are taking the only measures we have to bring inflation down.”

    Warren: “And putting 2 million people out of work is just part of the cost, and they just have to bear it?”

    Powell: “Will working people be better off, if we just walk away from our jobs and inflation remains 5, 6 percent?”

    This was an unusually testy moment from Powell, who is generally calm and collected under questioning, including from Warren.

    But this conversation highlights the key points that both officials have been making. In the senator’s mind, inflation is largely caused by problems like supply chain issues and corporate greed — issues that are unrelated to overspending, which is what the Fed is designed to counteract. (To get to that two million number, she’s pulling from Fed projections that unemployment could rise to 4.6 percent.)

    For Powell and his fellow Fed officials, they have a key role to play in bringing down price spikes, and they’re the ones who have been tasked to do it, even if there is a cost.

    Sen. Catherine Cortez Masto (D-Nev.): “I want to have the opportunity to address Sen. Warren’s conversation with you earlier about the tools that you have and the impact that it has on causing potentially more people to be unemployed.”

    Powell: “We do not seek, and we don’t believe we need to have a very significant downturn in the labor market. … You’re starting from such a strong labor market, it seems as though you’re a long way away from anything that looks like a recession, just looking at the labor market by itself.”

    Here, the Fed chief is making a point that even if unemployment rises to 4.6 percent, as central bank officials projected in December, that would still be relatively low by historical standards.

    He’s being relatively hopeful here about the prospects for the job market and the economy as a whole, but the words “very significant” are notable; it suggests he’s still expecting unemployment to rise at least somewhat.

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    ( With inputs from : www.politico.com )

  • Fed’s Powell faces Wall Street firing line on Capitol Hill

    Fed’s Powell faces Wall Street firing line on Capitol Hill

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    It’s clear the push is already getting traction. Sen. Tim Scott (R-S.C.), joined by nine other Republicans who will be in a position to grill Powell this week, told the Fed chair in a letter Friday that there’s no reason to hike capital requirements for the banks.

    “Nobody is going to miss the point of this letter, which is hammering Jay Powell to testify the way Wall Street’s biggest banks want him to testify, with the suggestion that there will be political consequences if he doesn’t do that,” said Dennis Kelleher, president and CEO of the watchdog group Better Markets.

    In a financial policy space where crypto has become the bright, shiny object for Congress, the hearings are poised to reveal how much juice the big bank lobby still has in Washington. For Powell, it’s a test of whether he wants to take on Wall Street in addition to the battle he’s waging on inflation. The banks have framed the potential increase in regulation as a threat to the economy because they say it would force them to retrench in the services they provide — a familiar lobbyist talking point that may have new political salience as the U.S. stares at a potential recession.

    “In response to higher capital requirements, banks have two choices,” JPMorgan Chase CFO Jeremy Barnum said last week, summing up the banks’ case at a Washington symposium hosted by the Bank Policy Institute trade association. “We can charge higher prices or we can do less lending. Both of those choices are ultimately bad for consumers and businesses.”

    Barnum’s appearance in Washington was part of a broad lobbying effort by the industry to grab the attention of policymakers. The Bank Policy Institute, the Financial Services Forum and the Securities Industry and Financial Markets Association have been flooding email inboxes for weeks with arguments against raising capital requirements, in addition to closed-door meetings with lawmakers and their staffs. It’s the industry’s top issue in Washington this year.

    The calibration of bank capital requirements has major ramifications for the economy. It requires regulators to strike a balance between preventing a financial crisis — which could be triggered by an unforeseen event, like a pandemic — while not limiting banks so much that it crimps economic growth.

    “Every decision a bank makes first factors capital costs or benefits,” Federal Financial Analytics managing partner Karen Petrou, who advises lenders on policy, wrote last month.

    The largest banks in the U.S. were subject to higher capital requirements after the 2008 global financial crisis, as regulators around the world sought to protect taxpayers from having to bail out the industry again during a future meltdown. Banks survived the depths of Covid-19, armed with bigger capital buffers and buoyed by a flood of government rescue money across the economy.

    The issue is returning to the top of banks’ agenda again because U.S. regulators are in the process of finalizing the last piece of the post-2008 capital rules, with a proposal expected by the summer.

    But the Fed in the last couple of months has upped the ante.

    Fed Vice Chair for Supervision Michael Barr, a Biden-appointed official who is the central bank’s point man on regulation, triggered the banking lobby late last year when he announced plans for a “holistic” review of bank capital. He also signaled that he already had a view that the current rules aren’t strong enough.

    “History shows the deep costs to society when bank capital is inadequate, and thus how urgent it is for the Federal Reserve to get capital regulation right,” Barr said in December. “In doing so, we need to be humble about our ability, or that of bank managers or the market, to fully anticipate the risks that our financial system might face in the future.”

    The lenders are complaining that Barr should be more transparent about the process, though he has taken time to speak with bank executives. Barr said in December that any rule changes would be subject to public notice and comment.

    “It is an internal process,” said Kevin Fromer, who represents executives of the largest U.S. banks as CEO of the Financial Services Forum. “We, as well as the rest of the public, are outside looking in.”

    Barr isn’t the only threat. Banks expect the Federal Deposit Insurance Corp., which is also led by a Biden appointee, is going to push for stricter rules as well. Senate Banking Chair Sherrod Brown (D-Ohio), who leads Congress’s Fed oversight, has long argued for higher capital requirements and may provide political cover.

    Now the big banks and their allies in Congress want to know whether Powell plans to defer to his colleagues or will intervene.

    Scott, who is seen as a likely 2024 GOP presidential candidate, told Powell with fellow Republicans Friday that it was “incumbent on you” to oversee the capital review launched by Barr. They warned Powell against violating a 2018 law that eased bank regulations. And they echoed points made by the banking industry about the potential impact on borrowing costs, investment and the competitiveness of U.S. markets.

    “We have received the letter and plan to respond,” a Fed spokesperson said.

    It’s unclear where Powell will come down on the issue. But during the Trump administration, he responded to calls by big banks to lower their capital requirements by saying that the levels were “about right,” and he dismissed suggestions that strict regulations were hurting their ability to compete with foreign banks. He supported moves to loosen rules around the edges.

    The Republican-led House has made the issue a priority as it ramps up scrutiny of the Biden administration. Rep. Andy Barr (R-Ky.), who leads the subcommittee overseeing the Fed, said in a statement that he is planning “vigorous oversight” of the capital review. He will be one of the lawmakers grilling Powell this week.

    “I am particularly focused on preventing regulators from imposing excessive requirements that would sideline capital as we continue to battle forty-year high inflation,” Barr said.

    Kelleher’s group Better Markets is pushing back, arguing that capital standards should be raised to protect the economy from bank failures and taxpayer-funded bailouts.

    “Congress’s job is to ask questions,” he said. “But their job isn’t to try and basically work the refs by trying to bully them into an outcome that is not actually data-driven or risk-driven.”

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    ( With inputs from : www.politico.com )

  • While Biden celebrates a soft landing, the Fed’s Powell is worrying

    While Biden celebrates a soft landing, the Fed’s Powell is worrying

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    The path ahead will come into clearer focus on Tuesday when the Labor Department reports the Consumer Price Index for January, which is likely to show that inflation fell for the seventh consecutive month. It ran at an annualized rate below 3 percent during the second half of 2022 — an encouraging trend.

    With job growth surging and wage gains leveling off, there is more hope now than in almost a year that the economy can slow along with inflation without a painful recession — a so-called soft landing. But prices still rose faster than they had in four decades last year, and Powell says he’ll do what it takes to keep borrowing costs high and prevent price increases from becoming a more permanent feature of the economy.

    “We’re in an economy right now that obviously has some bright spots and darker spots with inflation still in the process of coming down,” said Tobin Marcus, a senior policy and politics strategist at Evercore ISI who was an economic adviser to then-Vice President Biden. “The president, for very clear reasons, is more interested in highlighting the bright spots, whereas Powell still needs to keep some focus on the need to finish the job.”

    So if inflation is running close to the Fed’s 2 percent target rate even amid a hot labor market, why does the central bank feel the need to repeatedly warn that it’s poised to continue raising interest rates and risk a recession? Inflation is a complicated beast, and there’s a lot of history here.

    Here are five key questions about what’s going on with consumer prices and what might be ahead for the economy, Biden and Powell.

    You said the job market is booming. Why am I always reading about how there might be a recession?

    The Labor Department recently reported that unemployment had hit its lowest level since 1969 at 3.4 percent. The only time it has been lower in modern U.S. history was during the Korean War. It’s an ideal bragging point for Biden, who has touted his record on jobs in his annual State of the Union address and on the road since then. But Powell is eyeing low joblessness with worry that it might lead wages to skyrocket, pushing up labor costs for employers and therefore prices — what’s known as the wage-price spiral.

    As far as the Fed is concerned, inflation is what’s important, but the job market is an important signal about where prices might be headed. Demand for goods and services is what creates jobs, and it’s also what gives people money to spend. That is, a very strong job market is a sign that consumers and businesses will be able to support rising prices.

    Basically, the Fed is willing to risk a recession if it means avoiding what happened in the 1970s — when the central bank backed off on interest rate hikes and inflation repeatedly came back with a vengeance. The logic is essentially this: We know how to deal with recessions. Killing inflation is harder. So it’s better to err on the side of overdoing it, since you can always change course and cut borrowing costs.

    Does the Fed really need to hurt the job market to bring down inflation?

    That’s the multitrillion-dollar question. A lot of experts would say no, pointing to idiosyncratic factors — supply shortages, government spending, Russia’s war in Ukraine — that have driven this bout of inflation and can’t be cured by higher interest rates. Certainly, to the extent that inflation has cooled, a big part of that is the fading of those temporary factors.

    But if inflation doesn’t continue its downward trajectory, Fed officials will want to raise rates higher, or perhaps just keep them at punishing levels for longer, until they see what they call a softening in the labor market — fewer job openings, slower wage growth, and, more than likely, somewhat higher unemployment.

    Wait, did you say inflation has been running just above 2 percent for the last six months? Isn’t that the Federal Reserve’s target? Are they almost done?

    Yes, the Fed’s goal is 2 percent inflation, but no, they’re not done. A big reason price spikes have come down so much is because of gas prices, which are volatile and driven by global circumstances. Powell and his fellow policymakers want to be sure that inflation is cooling across the board. The prices of goods like furniture and cars have dropped, while rents may be slowing their ascent. But for the Fed, swelling prices are still a concern in core services businesses (think restaurants, transportation, health care), where labor costs are a major expense. Over the last six months, prices there have risen 4.7 percent.

    So that’s where wages come in. Are wages growing progressively faster?

    No, wage growth isn’t accelerating. But Fed officials and other economists think that worker pay, which grew about 5 percent in 2022 (compared to a 6.5 percent increase in the CPI), is still rising too fast for inflation to sustainably come back to 2 percent. For comparison, wages were growing about 3.5 percent annually before the pandemic, when inflation was a bit below 2 percent.

    There’s an argument that the Fed doesn’t need to be too concerned because incomes are simply recovering after getting hammered by inflation, and workers will stop pushing for as big raises once price spikes get more under control. But the fact that the unemployment rate is so low has the Fed worried that worker shortages will shift that trend. At the very least, they’d like to see a reduction in job openings.

    All this doesn’t seem to bode well for 2024, and anyone trying to get reelected then.

    Yeah, the Fed chief has suggested that unemployment could rise a percentage point or more as the central bank continues to increase borrowing costs to slow spending. The tension between where the economy is and where it might be heading has been thrown in stark relief in recent days: both Biden and Powell want to bring down inflation, but the Fed is likely to undermine one of the president’s biggest selling points heading into 2024.

    “I believe both [Biden] and Powell would order the same items off the menu,” said Jason Furman, who served as chief economist to former President Barack Obama. “But they think the menu is very different, with POTUS seeing the soft landing as an item that is on it while Powell is much less certain that it is.”

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    ( With inputs from : www.politico.com )

  • Jobs blowout: What the employment report means for Biden and Powell

    Jobs blowout: What the employment report means for Biden and Powell

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    President Joe Biden and the White House can celebrate the report as evidence the economy is continuing to hum along, and it will blunt attacks from Republicans over the administration’s spending policies. But senior officials in the West Wing were privately hoping for a less-robust number. So was Fed Chair Jerome Powell.

    Here’s how the number is likely to play with four key political and economic figures.

    Biden — The White House can view the report as evidence that economists’ predictions of an imminent recession are off-base. But inflation is Biden’s biggest enemy on the economy, and the report will cause some unease within the administration, given that it could mean the Fed will crack down harder on growth to curb prices.

    Still, the report clashes with the expectations of many economists and Wall Street CEOs that the U.S. will fall into a recession this year.

    Biden often describes the recent slowdown in job growth that preceded Friday’s number as a good thing as the economy transitions from the rapid Covid-19 comeback to a period of what he calls more “steady and stable growth.

    Senior White House aides have said they are happy with declining numbers — as long as they stay positive — making it easier on the Fed to end the rate increases as soon as possible. They believe the decline in inflation is already well underway, with consumer price growth slowing for six straight months.

    Biden wanted a good jobs number. But maybe not this good.

    Powell — The report is likely to come as a jolt to the Fed chair. Powell said in a recent speech that the economy only needs to gain about 100,000 net jobs a month to keep up with the number of new people entering the workforce.

    He’s strongly committed to bringing inflation to the central bank’s target range of 2 percent. Since the Consumer Price Index peaked last June at 9.1 percent, inflation has steadily fallen, hitting a still-high 6.5 percent in December.

    Powell and the Fed on Wednesday again raised rates by a quarter of a percent, the eighth straight increase. But it was the smallest bump since March. He cautioned at his press conference that more hikes lay ahead, saying “the job is not fully done.”

    Any single report can be an outlier and is unlikely to sway the Fed. But Powell is worried about the hot jobs market driving up wages, fueling inflation. So any news showing the market heating rather than cooling could be unwelcome.

    “My base case is that the economy can return to 2 percent inflation without a really significant downturn or a really big increase in unemployment,” Powell said Wednesday. “I think that’s a possible outcome. I think many, many forecasters would say it’s not the most likely outcome, but I would say there’s a chance of it.”

    In one positive sign for Powell, wages rose 0.3 percent in January, down from 0.4 percent in December. What the Fed chair fears most is a “wage-price spiral” in which higher wages drive prices and create a dangerous inflation cycle. That is not evident in this report.

    Economist Larry Summers — The former Treasury secretary under former President Bill Clinton has long been saying that more Fed rate hikes will be needed to rein in the labor market. This report could offer more fodder for that argument.

    Summers was among the few who predicted fairly early that inflation would soar and stay high for a long period of time. At the time of his initial call last February, the Fed, the White House and other Democrats were still assuring Americans that the inflation spike would be “transitory.” It wasn’t.

    Summers has also repeatedly irritated the White House by suggesting that the trillions in new spending approved by Democrats in Congress and signed into law by Biden over the last two years played a role in the inflation spike.

    He also maintained for months that the Fed’s rate-hiking campaign, while necessary, would almost certainly lead to significant recession and a near doubling in the unemployment rate. He has more recently softened his tone and been more receptive to the idea that a soft landing is even possible.

    “I’m still cautious, but with a little bit more hope than I had before,” Summers said last month. “Soft landings are the triumph of hope over experience, but sometimes hope does triumph over experience.” This number is likely to get Summers to tilt back toward experience.

    House Speaker Kevin McCarthy — The stunning jobs report will undercut the argument by McCarthy and other Republicans that Biden’s economy is fading fast under the weight of inflation, which they say is driven by big spending bills.

    Still, the more aggressive the Fed feels it has to be in killing inflation, the higher the risk that the central bank will push the economy into recession. A slumping economy would give the Republicans ammunition to use against Biden and the Democrats in the 2024 campaign.

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    ( With inputs from : www.politico.com )

  • Fed’s Powell warns of more pain ahead: Key takeaways

    Fed’s Powell warns of more pain ahead: Key takeaways

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    “We have more work to do,” he said. “We’re going to be cautious about declaring victory and sending signals that we think the game is won.”

    Still, Wednesday’s move, the smallest rate increase since last March, brings policymakers another step closer to an expected pause in their inflation fight sometime this year — and stock markets rose on the day. The Fed’s main borrowing rate now sits between 4.5 percent and 4.75 percent, up from near zero early last year.

    Unemployment is still at modern lows, even after all the aggressive rate hikes, feeding hopes that the U.S. may be able to avoid a recession — a crucial goal for President Joe Biden before the 2024 election. But that will hinge on how much more the central bank increases rates and then how long it waits to lower them again.

    Powell gave some hints on what the Fed might do. Here are some key quotes from the Fed chief and what he meant:

    “We are not yet at a sufficiently restrictive policy stance, which is why we say that we expect ongoing hikes will be appropriate.”

    The central bank has raised interest rates high enough to bite into economic growth, but Powell says it needs to go further to bring inflation to heel. The key word here is “ongoing,” which suggests it will be more than one additional increase. He later signaled that could mean “a couple more” — which would be consistent with what officials had forecast in December.

    According to those forecasts, the Fed expects to raise rates to about 5 percent before stopping, but that will depend on whether inflation continues its downward trend. Powell also held open the possibility that rates could rise even more if incoming data starts to look worse.

    “Finding out in six or 12 months that we actually were close but didn’t get the job done, inflation springs back and we have to go back in … This is a very difficult risk to manage.”

    The message here is that it’s better to err on the side of whipping inflation a little too soundly — even if it means throwing the economy into a painful recession — than risk that the price surges come roaring back. But his best guess right now is that no downturn is in store — a view that clashes with that of many economists and Wall Street CEOs.

    The economy grew at a healthy 2.9 percent annualized pace in the last three quarters of the year, suggesting the U.S. is still far from dipping into a recession. But there’s always a lag in the impact of monetary policy, and growth could slow further as the Fed’s rate moves feed through to economic activity.

    A closely watched survey on Wednesday showed that manufacturing is contracting, and the housing market has been hammered for months by high mortgage rates, though the job market has remained resilient.

    “Generally, it is a forecast of slower growth, some softening in labor market conditions and inflation moving down steadily, but not quickly. And in that case, if the economy performs broadly in line with those expectations, it will not be appropriate to cut rates this year.”

    Powell and his fellow officials have been struggling to convince markets that rate cuts are unlikely later this year. This matters because the Fed wants market-set rates to remain high and stock prices to stay muted, as part of its efforts to restrain spending and investment. Investors haven’t bought into that message though and are overwhelmingly betting on rate cuts in 2023.

    Here he seems to be striking a balance by saying that he expects inflation to come down only slowly, which will mean holding rates higher for longer. That could also come alongside fewer job openings, slower wage growth and higher unemployment — euphemistically called “softening in labor market conditions.”

    But he also left the door open to rate cuts if inflation comes down more quickly.

    “We are neither pessimistic nor optimistic.”

    Powell repeatedly acknowledged that inflation is coming down but also said the fight isn’t over. The prices of goods like furniture and cars have dropped, he said, while there are signs that rents may be slowing their ascent. But surging prices are still a concern in core services sectors, where labor costs are often the biggest expense.

    Here he is saying that Fed officials are trying to watch how the economy evolves and not assume how close they are to beating inflation yet.

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    ( With inputs from : www.politico.com )

  • Wall Street bets Powell will flinch on rate hikes once job market sours

    Wall Street bets Powell will flinch on rate hikes once job market sours

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    The market’s expectation that the central bank will ease up is partly driven by the presence of new faces on the Fed’s seven-member board in Washington. In addition to reappointing Powell, President Joe Biden named three new members and promoted Lael Brainard, who in past years advocated for going slow on rate hikes, to Powell’s No. 2.

    Other new Fed officials outside Washington are economists who have long pushed for broad and inclusive employment. Among them: Austan Goolsbee, a onetime chief economist to former President Barack Obama who recently became head of the Chicago Fed and joined his first central bank policy meeting this week.

    “There’s a pretty strong view that they will ease sooner than they say they will,” said former Kansas City Fed President Thomas Hoenig, whose tenure included the 2008 financial crisis when the economy was losing more than 700,000 jobs a month. “The pressure would be to say, ‘Well, we’re just about there, we can ease back.’”

    Fed officials on Wednesday are expected to hike rates by another quarter of a percentage point, nearing the central bank’s target of 5 percent for its main borrowing rate. The aim is to get inflation down to 2 percent — less than half of where it is now.

    The Fed wants to ensure that it keeps rates high long enough to bring inflation fully to heel, fearing a repeat of the 1970s and ‘80s when the central bank backed off, only to see price spikes return.

    But investors are pricing in a greater than 75 percent chance that interest rates will be lower in December than in June, according to CME FedWatch. They aren’t convinced that the Fed will keep its key rate at a punishingly high level for long, particularly if inflation keeps falling and unemployment begins to spike.

    Inflation has dropped for six straight months, fanning hopes that the surge in prices is on its way to ending. Quarterly data on companies’ labor costs released Tuesday shows that wage growth, a driver of inflation, also continues to tick down.

    Yet even though consumer price increases have cooled, Fed officials are maintaining their tough talk with the idea of leaving borrowing costs high enough to keep inflation on its downward trend. They say wage growth will need to slow even further. And Fed policymakers have publicly been in lockstep on how fighting inflation is their most important priority.

    That tone could shift if economic indicators allow some members of the rate-setting committee to make the case that inflation is easing even without a significant rise in joblessness from 3.5 percent now. The Department of Labor on Friday will report January’s employment numbers, and they’re expected to show a slower, but still steady increase in job creation.

    “There is a growing contingent on the committee who will grow very uncomfortable in the second half of the year not cutting [rates] as unemployment rises,” said Derek Tang, an economist at LH Meyer Monetary Policy Analytics, a research firm chaired by former Fed Governor Larry Meyer. “By their own account, they think [the unemployment rate is] going to rise into the 4s. This is all in the service of trying to bring inflation down, but when the rubber meets the road, things might feel a bit different.”

    Brainard, the Fed’s vice chair, recently pointed to high profit margins that might give companies room to hold onto workers, particularly as supply chains continue to improve and help them save some costs. That means inflation could ease further without as much of a hit to the job market, she said.

    Meanwhile, getting inflation back to 2 percent in the short term might not even be feasible, depending on what’s causing it.

    Officials like Goolsbee say that if the Fed tries to counteract inflation that’s caused by supply problems, rather than by overspending, that could run the risk of a recession without actually cooling prices — what’s often termed “stagflation.” That makes the risks facing the central bank more complicated, he told CNBC last year, before he joined the central bank.

    “The Fed has got to balance out some things it doesn’t normally need to balance out,” Goolsbee said at the time.

    Other prominent regional Fed presidents, who have rotated out of a voting seat this year but are still part of the debate at rate-setting meetings, might also make the case for a gentler approach to the economy, such as Boston Fed chief Susan Collins. In 2019, Collins, then a professor at the University of Michigan, supported raising the central bank’s inflation target slightly above 2 percent to give more room for the job market to recover during downturns.

    Still, the ultimate stance of the committee will depend on how the economy actually evolves. Even Fed officials such as Brainard or San Francisco Fed President Mary Daly, who are historically considered to be “doves” — in central bank parlance, more worried about harm to the labor market than the risk of inflation — have been resolute in the face of price spikes.

    Policymakers across the board have said they don’t expect to cut rates this year because they will need to stay at a high level for a while to ensure that high inflation doesn’t become embedded in the economy. That could lead the Fed to keep the brakes on much longer than markets expect.

    Tim Duy, chief U.S. economist at SGH Macro Advisors, noted that more dovish officials haven’t shifted their rhetoric yet, “even given the extent to which data has turned in their direction.”

    And some officials have pushed for the central bank to be even more aggressive in the face of rising prices, including Minneapolis Fed President Neel Kashkari and St. Louis Fed President James Bullard. Kashkari, who before the pandemic was an outlier in advocating for particularly low rates, has during this bout of inflation pressed for raising rates higher than officials’ median forecast. He has a vote on rates this year, as does Goolsbee.

    “I’m just wary about assuming anybody’s priors anymore,” Duy said.

    Meanwhile, the direction of debate could also shift considerably if Brainard leaves; she’s currently a contender to replace Brian Deese as head of the White House National Economic Council, according to people familiar with the matter.

    “Given the working relationship that she and Powell have had over several years, I think she really plays an important part in the thought leadership and the direction things are moving,” said Claudia Sahm, a former senior economist at the Fed.

    Still, even given Brainard’s worker focus, she will be pragmatic about how much progress is being made against inflation, Sahm said. “Maybe later in the year it will matter, but for now, dove, hawk, moderate — they’re going after inflation.”

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    ( With inputs from : www.politico.com )