Commentary on Political Economy

Wednesday 20 March 2024



Surveillance Special: Powell Serves Up Words Rather Than Answers

El-Erian hears a signal of Fed tolerance for higher inflation, and so does the market

Fed Chair Jerome Powell was pressed by reporters to square the central bank’s US economic outlook with no change in estimates regarding 2024 rate cuts.

Photographer: Al Drago/Bloomberg
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‘It’s everybody back in the pool’

In the torrent of words from the Federal Reserve’s statement and Chair Jerome Powell’s press conference, some of the numbers stood out. And underneath the data was an implicit suggestion that the Fed is going to stay quite patient on inflation in order to achieve a soft landing.

“This is a signal and the market is taking it as that, that they will tolerate slightly higher inflation for longer,” Mohamed El-Erian said on the Surveillance Fed special today, unpacking a stand-pat rate decision in which nuance was everything.

Wall Street heard a message loud and clear. Stocks ripped higher, yields on two- and 10-year Treasuries fell, gold rose and traders actually nudged up their bets on a Fed ready to cut rates in June. “As you see in the equity market today, it’s everybody back in the pool,” BlackRock’s Jeffrey Rosenberg said.

El-Erian, the president of Queens College, Cambridge, and a Bloomberg Opinion columnist, said the Fed eventually would need to redefine what rate accompanies a soft landing. “This is the first step in that process,” he said of today’s Fed decision.

When Powell was asked specifically about recalibrating to something other than the Fed’s 2% inflation target, he offered a lot of words and indicated that this wasn't the case, but didn’t really address it further. He even suggested that the Fed was going to wait a longer period of time for inflation to get to target.

This, of course, raises a philosophical question: How long can the Fed accept hotter-than-desired inflation before policymakers have de facto adjusted the targeted inflation rate? If you say you’re going to be rich one day but you’re happy only earning a penny a day, is it really your goal to be rich?

William Dudley, the former New York Fed president who is now a Bloomberg Opinion columnist, gently pushed back at Jon’s joking suggestion that Powell’s real message was simply “buy stocks.” But he did detect an important tell in Powell’s response to a question about whether financial conditions were too loose.

“He did not take the bait on financial conditions easing,” Dudley said. “And of course when he doesn’t take the bait on financial conditions easing, what does it do? It causes financial conditions to ease more.”

A look at the dots

Here is how the Fed’s Summary of Economic Projections — the so-called dot plot — looks when rendered as a graphic on the Bloomberg Terminal.

History, and a couple of laughs

Powell isn’t known as a jokester, but he did provide a moment of levity when a reporter observed that regular, post-meeting press conferences were an innovation that was only 13 years old. Powell said the tradition has been helpful.

And, he was asked, is there ever a day when he wanted to roll back that practice? “Of course not,” the chair fired back with a smile, to chuckles rolling through the room.

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