Yesterday the Chair of the US Federal Reserve went to Nashville Tennessee. Presumably not for the country music as he is a Grateful Dead fan. But he did give a speech on the subject of monetary policy. As we were reminded of the way he uses Nick Timiraos of the Wall Street Journal by the way the recent 0.5% cut was flagged before it happened let us take a look at what he is saying.
Federal Reserve Chair Jerome Powell said the central bank would continue to reduce interest rates from a two-decade high to help support hiring and preserve a growing economy.
“Overall, the economy is in solid shape; we intend to use our tools to keep it there,” he said in remarks prepared for a talk Monday afternoon at a conference in Nashville, Tenn.
As you can see the message is that the economy is doing well which rather collides with the 0.5% interest-rate cut at the last policy meeting. For nest time we are being guided towards a smaller reduction.
Since their most recent meeting, several Fed officials have suggested the central bank might continue to lower interest rates in more traditional—and smaller—quarter-point increments unless the economy weakens more notably. The Fed’s next meeting is Nov. 6-7, and a rate cut of at least a quarter point is widely expected.
Plus a series of them is being signalled.
“Looking forward, if the economy evolves broadly as expected, policy will move over time toward a more neutral stance. But we are not on any preset course,” Powell said. “The risks are two-sided, and we will continue to make our decisions meeting by meeting.”
The Federal Reserve is a lot quieter these days as to where the neutral rate ( where the economy is neither being boosted or braked) actually is. But back in the day when they thought it was safely in the distance they suggested around 3% to 3.5%. So whilst we are being guided to smaller cuts of 0.25% we are also being guided towards a sequence of them. This is reinforced by the message that inflation is back under control.
Prices as measured by the Fed’s preferred inflation gauge were up 2.2% in August from a year earlier. A separate measure that excludes volatile food and energy prices was up 2.7% in August. Those measures jumped to as high as 7.2% and 5.6%, respectively, in 2022. The Fed targets 2% inflation.
They are hoping that you will not realise that the real issue is what we can expect in 2025 and 26 as nothing can be done about now anyway. Then we get to what the 0.5% cut in interest-rates was really about which is the labo(u)r market.
The unemployment rate stood at 4.2% in August, up from 3.7% in January. Powell in August signaled he was shifting the Fed’s attention to preventing what for now looks like a gentle cooling in labor demand from turning into a deeper freeze.
Again they are hoping you will not spot the contradiction between the message that the economy is strong and the “gentle cooling” here. It is often forgotten that the Federal Reserve has two objectives and it is quite plain that presently it is looking at the maximum employment one.
If we now switch to the speech itself we see yet again that we learn to think the opposite of what we are being told.
Many indicators show the labor market is solid.
He would not have changed policy tack if he really believed that. Also I do not now how many times I have pointed out over the years that reality keeps debunking the idea of a natural rate of unemployment.
To mention just a few, the unemployment rate is well within the range of estimates of its natural rate.
But central bankers cling to it because they can manipulate it to be pretty much what they want it to be Humpty-Dumpty style.
“When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’
’The question is,’ said Alice, ‘whether you can make words mean so many different things.’
’The question is,’ said Humpty Dumpty, ‘which is to be master — that’s all.”
He gets to his real point in the end.
Still, labor market conditions have clearly cooled over the past year.
We can also look at things via the Nick Timiraos twitter feed where he tells us this.
Powell: “This is not a committee that feels like it’s in a hurry to cut rates quickly.”
Having just cut by 0.5% there is clearly an issue here and it feels like Chair Powell is tilling the ground in case he feels the need to cut again by 0.5%.
Oh and as here seems to be an element of radio silence on the issue let me point out again that central banks usually avoid making interest-rate moves around election dates.
Bond Yields
These have not been behaving. What I mean by that is that I made a note of the US ten-year yield before the US interest-rate cut and it was 3.64% whereas now it is 3.75% and that has declined today following more poor economic data from Europe. So that tells rather a different story to what we are being told.
At issue is the average cost of debt (quite possibly still rising) and the marginal cost of debt, which is falling now that the Fed is cutting. ( Nick Timiraos)
The Economy
According to the official numbers things continue to be going rather well.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2024 is 3.1 percent on September 27, up from 2.9 percent on September 18.
Plus looking backwards there have been upwards revisions to the income version of GDP or if you prefer GDI. This has come via higher estimates for the savings rate. Personally I have very little faith in official estimates of savings as they are based much more on assumptions than measuring reality. But if you do the past just got better.
Chairman Jay Powell noted the revisions to the GDP and GDI. The upward revision to income and the saving rate, with rise in productivity growth are all more positive than September meeting. They are encouraged that the growth data is more reliable. ( @DianeSwonk)
Comment
These days speeches from central bankers are more about what they want you to believe than reality. Here Chair Powell is guiding us towards a 0.25% interest-rate cut in November whilst leaving the door ajar to another 0.5%. In election terms the latter would be an extraordinary move.
The real risk at the moment looks to be international with China now realising it needs a strong stimulus programme and the Euro area looking increasingly weak. We can look at the latter via a marked drop to 2.06% this morning in the German ten-year yield. Whilst we know that the Federal Reserve takes little note of economic events abroad it will take an interest if it feels the US will be affected. Let me now point out that both the US measures of the money supply ( M1 and M2) were lower in August 2024 than a year before.
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