Power Lunch - The Fed Decision 06/15/22

Episode Date: June 16, 2022

The Federal Reserve hiked rates by 75-basis points. That’s the first time the central bank has done that in 28 years. We have the decision, analysis and instant market reaction. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

But meantime, let's go to Steve Leasman with the Fed decision. 75 basis points to the Federal Reserve Open Market Committee raising the funds rate by 75 basis points to a new target range of 1.5 to 1.3 quarters percent. First time they've done a 75 base point rate increase since 1994. It plans to continue its plans to reduce the balance sheet as laid out in the prior month and anticipates additional increases in the funds rate. to it the new forecast from the Federal Market Committee show that they see the rate outlook for 2022 at 3.4%. That's up from 1.9. Pretty much meets where the market is.

For 2023, it's boosted its own rate outlook, the median official, to 3.8% from 2.8%. That's a full percentage point increase. And again, pretty much meets where the market was at. Maybe the market met where the Fed was at. We don't know which way this works, but it is one of the most dramatic increases in the outlook, the near-term outlook for sure, of the funds rate that we have since we've been publishing this since 2011.

The Fed repeating that inflation remains elevated. It sees the Ukraine war putting up with pressure on inflation. It says the China COVID situation, the lockdowns there, are worsening supply chain problems. Economic activity points out picked up in the second quarter from weakness in the first, obviously. It cut, however, it's 2022 and 2020 growth. forecast pretty sharply for 2022 by 1.1 percentage points, boosting the unemployment rate a bit for this year, 3.7%. But when you go out, they've raised it by a half a point in 2024. Boosted its core inflation. Now, look, just a bit to 4.3% for this year, but otherwise sees

core inflation declining to around its target of 2.3% in 2024. Finally, this was unanimous except for the fact that Esther George, the Kansas City Fed president, dissented wanting a 50 basis point increase, which is interesting in and of itself. But there you go, guys, a 75 basis point rate increase. And the Fed saying anticipates additional increases in the funds rate will be appropriate. Back to you. Steve, stick around. The market pretty much taking this in stride with stocks roughly at levels that they were before the decision hit. Same can be set of interest rates at this very early hour. Let's bring our panel back along with Mike Santoli and Rick Santelli watching the markets. And in fact, guys, let's start with you. Rick, a knee-jerk reaction here is what do you?

say? Knee jerk is a lot of volatility, but as the dust settles, we're right around unchanged, meaning we're right about where we started 339, 340 in a 10-year. Two-year no eels are a smidge higher, but what's fascinating is they dropped aggressively the two-year before they came all the way back. And that makes sense. Many believe, including myself, that the shorter maturities might be a little ahead of the game, considering that we have to do this on a meeting-to-meaning basis,

That's why things like three-month bills or six-month bills compared to two-year note yields are so interesting to watch. The issue I see is clear is that the Fed has a favorite inflation gauge, the personal consumption expenditure core deflator. It's up 4.9%. And everybody watching has a different form of inflation gauge they prefer. It's called the AAA National Average gas price, which today is $5.1. Therein lies the problem. And Tyler talked about trying to get the rest of the price.

reputation back, I can give you five numbers of why it's going to be difficult. 8.6 CPI, 18.9% export prices today, all-time record, down 20% of S&P, down 30% in the NASDAQ, and University of Michigan at a 1978 low of 50.2. That pretty much summarizes the hurdles the Fed needs to overcome to get back into the popular graces. And on top of that, and we turned Mike Santoli to you, the Fed is basically signaling here that from current levels, which we've already doubled, let's call it, in rates this year, we're going to double again. All officials projected rates rising to at least 3% by year end.

Is the market already pricing that in? Largely, Kelly, and I would say tentatively at this point, because really it's all about whether the bond market conveys the idea that the bond market is in tune with the new apparent path for the Fed, because that's the premise for whether stocks can stabilize. We're down 10% coming into today in four days in the S&S. and P-500. It's oversold, but also on very slippery footing because of the instability, I think, in bonds. There's two-way, I think, two-way Fed mistake risk is perceived out there, either

overtightening because all they're really doing is trying to attack gasoline prices, which they can't do. You know, you talk about Fed inflation expectations, and that was their seeming prod to go 75 this time. Inflation expectations in the University of Michigan Settlement Survey is basically gasoline prices. So if they're going after this one-day-old. thing that they may not be able to affect. I think it's okay. Look, financial conditions have tightened a lot. Jay Powell in the press conference could choose to emphasize that. And he might also be able to say, well, you talk about our credibility. We've only just been a lot of words in the last six months. And look at what's gone on with mortgage rates, with high yield debt spreads and all the other

things and stock valuations. We've kind of got a lot of this in the books already. Maybe we're sort of front-loading it and you can see around the hill to when it's almost over. And David Kelly, there are a couple hints of dovageness, if you want to call it that, in this decision. Interestingly enough, Esther George dissented in favor of a smaller increase. We tend to think of her as somewhat more on the hawkish side, but she only wanted a half-point hike. And the median Fed officials sees the rate at 3.8% at the end of next year. And you could argue maybe the market had actually gone a little higher than that. A little bit, but the markets moved very fast in the last few days, even as the Fed officials are putting in their forefinding.

So I think it was a given that the market was going to be a little higher than the Fed today. But I think it's really interesting that Esther George, who has, as you say, a reputation, a long-lived reputation of being a Hulk, recognizes perhaps that the Federal Reserve is about to make its typical mistake of waiting too long and then doing too much. And when it comes to credibility, it's really important they, you know, don't overdo this here because I think by the end of the year they're going to have to be singing a significantly different tune. and I'd rather not see that, to be honest. John, let me ask you to respond to what David just said, waiting too long and doing too much. John says that there are already signs of a dramatically slowing economy,

baked into the cake, and this is going to be the cherry on top, I suppose, and not in a good way. Yeah, you know, I think that's the risk. The Fed is clearly responding to last week's CPI print. That was higher than expectations prior to that. You know, all the guidance had been for 50 basis points. you get a high CPI print, and now they're doing 75.

The risk is, is CPI, at least parts of it, tend to be backward looking. The shelter components in particular reflect changes in house prices and rental prices that happened months ago. I think what we all know is what's happening in the housing market right now is substantially different than what was happening at the beginning of the year. Mortgage rates are higher. Every indicator of housing activity is turning. You saw that in the National Home Builders survey this morning. Home sales, home starts. You know, we're going to see a pretty sharp turn here.

And so the risk is that they're responding to a backward-looking indicator in CPI, and those more forward-looking indicators do signal a turn in activity and probably in prices. And I think that generally is the risk that they face. So I just want to echo. I find Esther George's descent interesting. I hope she'll explain that in a subsequent piece. That is a little bit unexpected. But I'm very much with David that the risk here is that they're responding to backward-looking indicators

where the forward-looking indicators actually suggest something different. Let me ask you, Mona, the Fed sees inflation at 5.2% at the end of this year and at something about 2.6% at the end of 2023. You think they can get that? Yeah, you know, I think all of my colleagues here have highlighted. It really does come down to the inflation and inflation expectations. The Fed, I think, is reflecting what we did see this past Friday, where headline CPI came in well above expectations,

and they move that up to 5.2%. Interestingly, core inflation, of course, excluding food and energy, was lower 6% in the CPI print trending downwards, and I think that's reflected as well. I think they do think they can get 2.7% next year. Keep in mind, you know, the Fed actions really do impact core. And two trends we've been seeing, one that John just highlighted, cooling housing market,

but the other one is a potentially cooling labor market. We've already started to hear technology companies, having layoffs over time that will impact not only the unemployment rate, but the potential wage growth that we've been seeing. So as the Fed has been indicating, as we've been saying here, I think generally by the end of the year, we should see moderating inflation. And that will really be this cycle's Fed put. The Fed can then go at a more gradual pace. They won't back off until inflation starts to come back towards their 2% goal. But if they start moving at a more moderate pace, I think that's really when market sentiment can turn in a more meaningful way.

We've seen stocks give up most of their gains. Rick, we saw the Dow up 400 points earlier today. We were up about 100 going into the meeting. We briefly dip negative. We're up 60 right now. NASDAQ is still up 1%. This now, any comment on why we might be fluctuating more to the downside just in the last couple minutes here? Yeah, I really do think as this sets in, we are going to continue to see.

interest rates be the antagonist in this whole play against the equity market. So, yes, if you look as the dust settles, we're slowly starting to climb back. There's more flattening going on than steepening with regard to the yield curve since the 2 o'clock decision was announced. And I really do believe that the Fed may be right into projections of inflation. But therein lies the problem. Once again, what we have here is a failure to communicate. even if the Fed gets these inflation numbers down to 2, 2.5% or 3% by the end of next year, let's say.

That doesn't mean prices are going down. That just means they stop going up. But I'm sorry. But I think many viewers, as they look at prices, whether they pay for milk or eggs or houses or gasoline, the fact that they've stopped moving up is definitely a positive. But it's about moving down that they're most interested in. And I don't see that on the horizon anytime soon. Failure to communicate.

would say, Steve, failure to prognosticate. Let's look back to March when the Fed said 1.9% Fed funds rate at the end of this year. Now they are saying 3.4%. And as you pointed out, not five minutes ago when you broke the news, 2023, 3.8% on the Fed funds rate up from 2.8%. Those are significant changes in terms of the predictions. Yeah, I think we started printing these SECP. or summary of economic projections back at 2011. I think you'd be hard pressed to find a percentage point change in the outlook for the funds rate from one to the other.

But Tyler, maybe there's some good news in this, and I don't want Rick to have a coronary on this, but the market has been higher than the Fed for several weeks now. Maybe we're finally getting to someplace where we can agree on what the next several months of Fed policy looks like. I will just say the market has pushed ahead the futures curve for the funds rate a little bit today. But the Fed was at 1-9, the market was at 4. Now the Fed's at 3-8 for next year, and the market's at 4.

So the gap between the market and the Fed is much lower. And the question you have to ask yourself, the only thing I think that matters from an investment standpoint is, do you feel like 4 is enough to get the job done, to take control of inflation? If we're at a place now where the market has correctly priced where the Fed is going, and by the grace of God, the Fed has unbelievably or uncharacteristically priced where it's going, and this is where the market is, it's not the worst of all outcomes here if we've digested a potential 4% funds rate. So that's an interesting and I think for a dumbass like me, an esoteric point. And, you know, why not just say the truth here?

Come on. I will dissociate myself from that remark. In a practical sense, what does it mean that the market and the Fed may be actually approaching one another on where it means? What does it mean to me? It means you don't have to come in every morning and have the market swinging by 300 basis points because it believes the Fed's going to do another 50 basis points next week or next month. It means if you can get to a place where there's some agreement on the outlook, and what the task is at hand, we can take some of the volatility out of this market.

And it means that if you're a bond trader, you come in in the morning and you're not guaranteed to lose your shirt at the end of the day. Wouldn't that be nice? Mike Santoli, you want to give us a parting comment here? Yeah, I would say that it's certainly helpful if, in fact, the market's current projection of where the Fed's going to end up is in line with where the Fed itself is right now. I do think what's going to be key to listen for, though, from Chair Powell is, What cost is the committee willing to accept for success on inflation? Yes. Right?

You have the consensus projection of unemployment ticking up higher very modestly. And, you know, he's never been very strident about insisting that a soft landing was the likeliest scenario. So it's really about, they still, as part of the plan, you have to say maybe we'll get lucky. And maybe the numbers will start to work in our favor. And we're moving in the right direction on rates. And, you know, we can consider the 20, 23 projections, just some academic exercise, you know, until we know the actual facts of what happens between now and then.

All right. And again, we should mention the market looks very similar to what it looked like before this decision hit. Dow's up 76 points, 10 years at 341. Thank you, everybody so much today. David Kelly, Mona Mahajan, John Bellows, and Steve and Rick and Mike. We appreciate it. In a few more minutes time, we'll hear from Chair Powell himself. That's at half past the hour.

He's going to answer questions on the Fed's decision. It's battle against inflation and that tradeoff that Mike just mentioned, the future path of rate hikes. Before that, we have more analysis from former Fed Governor Randy Krosner. Keep it right here on Power Launch. All right, welcome back to Power Launch stocks, giving up some of their gains as we look there at the podium at which the Fed Chair will speak in just about 13 minutes time. The news of the hour is that the Federal Reserve for the first time since 1994 has raised interest rates by a full three-quarters of a percentage point. There you see the Dow Industrials, roughly where they were.

right, Kelly? Right before we went into this, it's been a wild ride, as you see, as you can see on a chart, if we had one there. Let's bring in Randy Krosner. He's Deputy Dean at the University of Chicago's Booth School of Business and a former Federal Reserve Governor. Randy, welcome. Take me inside the meeting that just happened and tell me what just happened. So I think they got very focused on the increase in expected inflation, those numbers that came out at the end of the last week. I don't think they put that much. emphasis on the inflation numbers that came out on Friday. One, it was the CPI, which they don't focus on as much as the other index that they use that comes with the GDP report, the PCE. But the thing that they're most worried about is inflation expectations become an anchor. So far, longer-term inflation expectations had been in the same range as they had been really over the last few years, maybe at the upper end of that range, but they broke out above that. I think that pushed them to 75, and I think that's the thing that they focus on most importantly.

Is this the Fed then being data dependent? Well, it's not just the data. It's being forward looking. It's looking at where the expectations are going. So as I said, I think it's not just about the inflation print from last week, which I don't think was that far out of line. I mean, a lot of people have focused on it as being so high. I think it was pretty much in line with the Fed forecasts. But the increase in inflation expectations. That wasn't what they were expecting. And I think that's what drove them to move more. And I think you're going to hear a very hawkish discussion at the press conference from Chairman Powell. Let me ask a perhaps impolite question and ask it as politely as I can.

If what they're doing is looking forward and trying to look at future indications of inflation, why should I believe they're any better today than they were last year when the buzzword was transitory? So I think that's right. That put a lot of their credibility on the line and some of that was lost. They didn't lose too much credibility because the longer term inflation expectations haven't become unanchored. They're starting to, and that's why they need to move now. And that's why I think it's really good that they're focusing on the forward-looking measures, where inflation expectations going. So even if inflation starts to come down a little bit, they have to look at where inflation expectations are because that's what's going to be

embedded into wage demands. That's what's going to be embedded into inflation going forward. Randy, why didn't they adjust the pace of quantitative tightening, which is starting off at a pretty small clip? I think it actually literally only started today. If they're going to go forward with much more aggressive rate hikes, was there an option to lean more heavily on balance sheet tightening instead? And if so, why didn't they pursue that? I mean, certainly they could have done that, but I think they're worried about market liquidity. Obviously, there's been a lot of discussion that you guys have had about how markets are bouncing around a lot are quite volatile. So I think they're worried about taking away too much liquidity too quickly.

And also, there's a lot of uncertainty about how balance sheet reduction translates into basis points on the Fed Funds rate. You know, estimates are that, you know, a trillion dollars would be on the order of a quarter point to a half percentage point. So just increasing the pace a little bit, probably is going to have the much effect, going from 50 to 75 and then having a pretty tough and stern outlook, which is, I think, what you're going to hear from Jay. I think that's going to be much more effective. Do we avoid a recession? Well, if you look at the projections, this is awfully softish, let's say. The unemployment rate moves up, you know, doesn't even move to 4%. I find that really hard to believe that we don't have a very significant increase

in both the unemployment rate and a much more significant decrease in economic activity. Does that mean back-to-back borders of contraction? Not necessarily. But I do think that right now in this projection, the numbers don't really add up. They said they want to go one and a half points above where they think the long-run neutral is, and that's only going to drive the unemployment rate to 3.9 percent. That doesn't seem to square for me.

Randy, thank you very much, as always. You make a hard thing easy to understand. We appreciate it. Randy Krosner of the Booth School at Chicago. He's like, Tums. He makes it more digestible. Yes. The Fed chairs press conference is just about eight minutes away.

These markets look a lot like they did before the decision. Will he change that trajectory significantly, as has often been the case? The real volatility typically kicks up as he takes the podium, so stick around for that. Our coverage of the Fed decision continues after this quick break. Welcome back, everybody. Before we get to Jerome Powell's press conference in about five minutes, let's bring in Bill Lee. He's the chief economist at the Milken Institute. And Bill, what's your reaction to this biggest rate hike in about 30?

30 years that we've seen? Kelly, I am so relieved. Chair Powell did the right thing as opposed to doing the conservative thing that most people would have thought. No one, the FMC never likes to think that the markets are in control and that markets are in the driver's sea for monetary policy. And somehow, Chair Powell was able to convince them that it's time to let the markets tell us that we can and should take up the slack that they've given us and take the whole 75 basis points. Fantastic move.

Let's talk a little bit about quantitative tightening. would you have like to have seen something more in that area? And back to what Randy Krosner just said. If you take, I forget what he said the number was, a trillion dollars out, you're probably the equivalent of a half-quarter point increase in rates. Well, as you know, every time I've come on your show, I've always been advocating we should do more with the balance sheet.

And I know people are so afraid of liquidity events, and that's what happened in the past. But the Fed has learned from the past that they can set up reserve policies to ensure the adequate amount of liquidity. Yes, they should have done more because they have to take charge of the narrative. The Fed is in control in terms of stamping out inflation and they want to do it now. Look at the ECB. They have a met morass right now in Europe because they move too slowly.

The Fed is doing the exactly the right thing and they could do more. What would you like to hear him say and what would you not like to hear him say as this press conference gets underway, Bill? The last thing I want him to hear him say is, well, next time we may go back to 50, depending on where the economy is going. I think right now he's got to show the markets that he will not stop short if the economy starts to slow down. GDP now, a forecast of Malata Fed is showing near zero growth for second quarter. So we are technically right on the edge of a recession. It's not terrible right now, given three and a half percent unemployment and the amount of excess employment in the labor markets to have a little bit of unemployment. what they have in their forecast is completely not credible.

So Chair Powell needs to channel his inner Volker. Absolutely. Inner Volker, inner Draghi. Because right now, if expectations get runaway, we're in big trouble. So let's talk about what you think is next from the Fed. They meet again in July and September and November, and I believe December is the last meeting. It's unlikely the inflation rate is going to die down very quickly,

especially the total number with food and energy. But the Fed should not be distracted by that. And they should say we're going to continue to press until we start to see inflation ease off. That's what Chair Powell has said for all along and just stay with that program. And do they need to spell out explicitly what progress is and looks like. I mean, he said he wants clear, I think, in convincing evidence that inflation is falling. Master, I believe, told us that for her that looks like inflation gauges rising only 10th or two each month. Does he need to get really explicit about what progress looks like,

whether it's market break-evens that he's looking at or, you know, how are we supposed to know otherwise if they think that this is working? Chair Powell will never give you the kind of explicit guidance that President Mester did, but he has to say something about the dashboard. What elements of the dashboard is most important to him? And he's got to say break-even inflation expectations, five-year, five years, the Michigan survey. Those are the numbers that he's going to have to emphasize. and say we're keeping an eye on how the people and markets react to the data, not just the data itself. They seem to have the feds would seem. I don't want to go into lapse into opinion here,

but there seems to be a credibility issue. How do they restore it? By sticking to this course of getting rid of inflation no matter what it takes. And no matter what it takes means allowing the unemployment rate to drift up and growth to slow down and even go negative. That's credibility. And Bill, does he also need to explain their thinking? You know, A lot of Americans still think this is only because of oil and that that has nothing to do with the Fed. Does he need to explain a little bit better why monetary policy needs to be in the driver's seat here? All he needs is one sentence to say the mistake we made in the 70s was to go to wage price controls because we looked at individual markets. Right now we need to incorporate aggregate supply and aggregate demand.

Supply is down, but we've got to bring demand down to where supply is. Right. But what about people who say, can't we just increase supply instead? Well, that's a function, not of the Fed, but of President Biden and other world leaders. And I think that he can easily fluff off to somebody else. But the supply side is something that he has no control over. The demand side is where he has absolutely control. And that's where he's going to use the nail inflation. Yeah, not that he wants to get into a nominal GDP discussion,

but it would be refreshing to hear him say, you know, economy that grows 10% nominally last year is one that has quite a lot of stimulus put behind it. Quick check on markets. Dow hanging on to about a 12-point gain here as Fed Chair Powell takes the podium. Let's listen in. We at the Fed understand the hardship that high inflation is causing. We're strongly committed to bringing inflation back down, and we're moving expeditiously to do so. We have both the tools we need and the resolve that it will take to restore price stability on behalf of American families and businesses. The economy and the country have been through a lot over the past.

two and a half years and have proved resilient. It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all. From the standpoint of our congressional mandate to promote maximum employment and price stability, the current picture is plain to see. The labor market is extremely tight, and inflation is much too high. Against this backdrop, today the Federal Open Market Committee raised its policy interest rate by three-quarters of a percentage point and anticipates that ongoing increases in that rate will be appropriate. In addition, we are continuing the process of significantly reducing the size of our balance sheet. I'll have more to say about today's monetary policy actions

after briefly reviewing economic developments. Overall economic activity edged down in the first quarter as unusually sharp swings in inventories and net exports more than offset continued strong underlying demand. Recent indicators suggest that real GDP growth has picked up this quarter, with consumption spending remaining strong. In contrast, growth in business-fixed investment appears to be slowing, and activity in the housing sector looks to be softening, in part reflecting higher mortgage rates. The tightening in financial conditions that we've seen in recent months should continue to temper growth and help bring demand into better balance with supply. As shown in our summary of economic projections, FOMC participants have marked

down their projections for economic activity, with the median projection for real GDP growth running below 2 percent through 2024. The labor market has remained extremely tight, with the unemployment rate near a 50-year low, job vacancies at historical highs, and wage growth elevated. Over the past three months, employment rose by an average of four 408,000 jobs per month, down from the average pace seen earlier in the year, but still robust. Improvements in labor market conditions have been widespread, including for workers at the lower end of the wage distribution, as well as for African Americans and Hispanics.

Labor demand is very strong, while labor supply remains subdued, with the labor force participation rate little changed since January. FOMC participants expect supply and demand conditions in the labor market to come into better balance, easing the upward pressures on wages and prices. The median projection in the SEC for the unemployment rate rises somewhat over the next few years, moving from 3.7% at the end of this year to 4.1% in 2024 levels that are noticeably above the March projections. inflation remains well above our longer run goal of 2%. Over the 12 months ending in April, total PCE prices rose 6.3%, excluding the volatile food and energy categories.

Core prices rose 4.9%. In May, the 12-month change in the consumer price index came in above expectations at 8.6%. And the change in the core CPI was 6%. Aggregate demand is strong. Supply constraints have been larger and long-lasting than anticipated, and price pressures have spread to a broad range of goods and services. The surge in prices of crude oil and other commodities that resulted from Russia's invasion of Ukraine is boosting prices for gasoline and food, and is creating additional upward pressure on inflation. And COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. FOMC participants have revised up their projections for inflation this year, particularly for total PCE inflation, given developments in food and energy prices.

The median projection is 5.2% this year and falls to 2.6% next year and 2.2% in 2024. Participants continue to see risks to inflation as weighted to the upside. The Fed's monetary policy actions are guided by our mandate to promote maximum employment and stable prices for the American people. My colleagues and I are acutely aware that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials, like food, housing, and transportation. We are highly attentive to the risks high inflation poses to both sides of our mandate, and we're strongly committed to returning inflation to our 2% objective. Against the backdrop of the rapidly evolving economic environment, our policy

has been adapting, and it will continue to do so. At today's meeting, the committee raised the target range for the federal funds rate by three-quarters of a percentage point, resulting in a one-and-a-half percentage point increase in the target range so far this year. The committee reiterated that it anticipates that ongoing increases in the target range will be appropriate, and we are continuing the process of significantly reducing the size of our balance sheet, which plays an important role in firming the stance of monetary policy. Coming out of our last meeting in May, there was a broad sense on the committee that a half-percentage point increase in the target range should be considered at this meeting if economic and financial conditions evolved in line with expectations. We also stated that we were highly attentive to inflation risks and that we would be nimble in responding to incoming data and the evolving outlook.

Since then, inflation has again surprised to the upside. Some indicators of inflation expectations have risen and projections for inflation. inflation this year have been revised up notably. In response to these developments, the committee decided that a larger increase in the target range was warranted at today's meeting. This continues our approach of expeditiously moving our policy rate up to more normal levels, and it will help ensure that longer-term inflation expectations remain well anchored at 2%. As shown in the SEC, the median projection for the appropriate level of the federal

funds rate is 3.4% at the end of this year, a percentage point and a half higher than projected in March, and 0.9 percentage point above the median estimate of its longer run value. The median projection rises further to 3.8% at the end of next year and declines to 3.4% in 2024, still above the median longer run value. Of course, these projections do not represent a committee plan or decision, and no one knows with any certainty where the economy will be a year or more from now. Overcoming months, we will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2%. We anticipate that ongoing rate increases will be appropriate. The pace of those changes will continue to depend on

the incoming data and the evolving outlook for the economy. Clearly, today's 75 basis point increase is an unusually large one, and I do not expect moves of this size to be common. From the perspective of today, either a 50 basis point or a 75 basis point increase seems most likely at our next meeting. We will, however, make our decisions meeting by meeting and will continue to communicate our thinking as clearly as we can. Our overarching focus is using our tools to bring inflation back down to our 2% goal and to keep longer-term inflation expectations well anchored. Making appropriate monetary policy in this uncertain environment requires a recognition that the economy often, evolves in unexpected ways. Inflation has obviously surprised to the upside over the past year, and further surprises

could be in store. We therefore will need to be nimble in responding to incoming data and the evolving outlook, and we will strive to avoid adding uncertainty to what is already an extraordinarily challenging and uncertain time. We are highly attentive to inflation risks and determined to take the measures necessary to restore price stability. The American economy is very strong and well positioned to handle tighter monetary policy. To conclude, we understand that our actions affect communities, families, and businesses across the country.

Everything we do is in service to our public mission. We, at the Fed, will do everything we can to achieve our maximum employment and price stability goals. Thank you, and I look forward to your questions. Thank you, Howard Schneider, with Reuters. Two related questions, Chair Powell. Do you feel you boxed yourself in with the language you used at the last press conference on 50-basis-point hikes in June and July? And would you please give us, as detailed a sense you can, of what role you played in reshaping market expectations so quickly on Monday? So, as you know, we always aim to provide as much clarity as we can about our policy intentions, subject to the end.

inherit uncertainty in the economic outlook because we think monetary policy is more effective when market participants understand how policy will evolve when they understand our objective function, our reaction function. And in the current highly unusual circumstances with inflation well above our goal, we think it's helpful to provide even more clarity than usual, again, subject to uncertainty in the outlook. So, and I think over the course of this year, financial markets have responded and have generally shown that they understand the path were laying out. Of course, it remains data dependent. And so that's what we generally think about guidance, and that's why we offer it.

And, of course, when I offered that guidance at the last meeting, I did say that it was subject to the economy performing about in line with expectations. I also said that if the economy performed, if data came in worse than expected, then we would consider moving even more aggressively. So we got the CPI data and also some data on inflation expectations late last week. And we thought for a while and we thought, well, this is the appropriate thing to do. So then the question is, what do you do? and do you wait six weeks to do it at the next meeting? And I think the answer is that's not where we are with this.

So we decided we needed to go ahead. And so we did. And that's really how we made the decision. Thanks for taking our question. Gina Smileywick with The New York Times. You, I guess I wonder if you could describe for us a little bit, how you're deciding how aggressive you need to be. So obviously, 75 today.

what did 75 achieve that 50 wouldn't have, and why not just go for a full percentage point at some point? Sure. So if you take a step back, what we're looking for is compelling evidence that inflationary pressures are abating, and that inflation is moving back down. And we'd like to see that in the form of a series of declining monthly inflation readings. That's what we're looking for. And by this point, we had actually been expecting to see clear signs of at least inflation flattening out and ideally beginning to decline.

We've said that we'd be data dependent, focused on incoming data, highly attended to inflation risks, the things that I mentioned to Howard moments ago. So contrary to expectations, inflation again surprised to the upside indicators, some indicators of inflation expectations have risen, and projections of this year have moved up notably. So we thought that strong action was warranted at this meeting, and today we delivered that in the form of a 75 basis point. Rate hike, as I mentioned. So the point of it really is this. We've been moving rates up expeditiously to more normal levels. And over the course of the seven months since we pivoted it and began moving in this direction, we've seen financial conditions tighten, and appropriately so.

But the federal funds rate, even after this move, is at 1.6%. So, again, the committee is moving rates up expeditiously to more normal levels. And we came to the view that we'd like to do a little more front-end loading on that. So I think that the SEC gives you the levels that people think are appropriate at given points in time. This was really about the speed with which you would get there. So as I mentioned, 75 basis points today. I said the next meeting could well be about a decision between 50 and 75. That would put us at the end of the July meeting, you know, in that range of, in that more normal range.

And that's a desirable place to be because you begin to have more optionality there about the speed with which you would proceed going forward. Just talking about the SEC for a second. What it really says is that committee participants widely would like to see policy at a modestly restricted level at the end of this year. And that's six months from now. And so much data and so much can happen. So remember how highly uncertain this is. But so that is generally a range of three to three and a half percent. That's where people are.

And that's what they want to see, knowing what they know now and understanding that we need to be, we need to show resolved, but also be flexible to incoming data as we see it. If things are better, we don't need to do that much. And if they're not, then we either do that much or possible even more. But in any case, it will be very data dependent. Then you're looking at next year, and what you're seeing is people see a bit more tightening in a range of maybe three and a half to four percent. And that's generally what people see as the appropriate path for getting inflation under control and starting back down and then getting back down to 2%. So 75 basis points seem like the right thing to do with this meeting, and that's what we did. Steve Leaseman, CNBC.

Thank you for taking my question, Mr. Chairman. You have not used the phrase in a long time monetary policy is in a good place, which is a phrase that you used to use often. Now that the committee is projecting 4% or 3.8% next year in terms of the funds rate, which is similar to where the market is now, the futures market of 4% funds rate next year, do you think that's a level that is going to be sufficiently high enough to deal with and bring down the inflation problem? And just as a follow-up, could you break that apart for me? How much of that is restrictive?

and how much of that is a normal positive rate that ought to be embedded or not, in your opinion, in the funds rate? Thank you. Sure. So the question really is, how high does the rate really need to go? And this is, you know, the estimates on the committee are in that range of three and a half to four percent. And how do you think about that? Well, you can think about the longer run neutral rate. You can compare it to that, and we think that's in the mid-toes.

You can look, frankly, at broader financial conditions. look at, you know, asset prices. You can look at the effect you're having on the economy, rates, asset prices, credit spreads, all of those things go into that. You can also look at the yield curve and ask all along the yield curve, where is the policy rate. So for much of the yield curve now, real rates are positive. That's not true at the short end. At the short end of the yield curve in the early years, you don't have negative rates still. So that really is one data point. It's one part of financial conditions. So I think I have to look at it this way. We move the policy rate. That affects financial conditions and that affects the economy.

You know, we have, of course, rigorous ways to think about it, but ultimately it comes down to do we think financial conditions are in a place where they're having the desired effect on the economy? And that desired effect is we'd like to see, you know, demand moderating. demand is very hot still in the economy. We'd like to see the labor market getting better in balance between supply and demand, and that can happen both from supply and demand. Right now, demand is substantially higher than available supply, though. So we feel that there's a role for us in moderating demand.

Those are the things we can affect with our policy tools. There are many things we can't affect, and those would be, you know, the things, the commodity price issues that we're having around the world due to the war in Ukraine and the fallout from that, and also just all of the supply side things that are still, you know, pushing upward on inflation. So that's really how I think I would think about it. But just 3.8%, 4% get it done because it gets the jobs done and break in the back of the budget? I think it's certainly in the range of plausible numbers. I think we'll know when we get there, really. I mean, honestly, that would be, you would have positive real rates, I think,

inflation coming down by then. I think you'd have positive real rates across the curve. I think that the neutral rate is pretty low these days. So I would think it would, but you know what? We're going to find that out empirically. We're not going to be completely model-driven about this. We're going to be looking at this, keeping our eyes open and reacting to incoming data, both on financial conditions and on what's happening in the economy. Thanks. Nick Timrose of the Wall Street Journal. Chair Powell, you've said that you like your policy to work through expectations, and now obviously this decision was something quite different from how you and almost all of your colleagues had set those expectations during the intermeeting period. And I know you just said that what changed was really the inflation data, the inflation expectations data.

But I'm wondering on the inflation expectations data, was there something you saw that was unsettling enough to risk eroding the credibility of your verbal guidance by doing something so different from what you had socialized? as before. So if you look at a broad range of inflation expectations. So you've got the public, you've got surveys of the public and of experts, and you've also got market-based. And I think if you look across that broad range of data, what you see is that expectations are still in the place, very much in the place where short-term inflation is going to be high, but comes down sharply over the next couple of years.

That's really where inflation expectations are. And also, as you get away from this episode, they get back down close to 2%. And so this is really very important to us that that remain the case. And I think if you look for most measures, most of the time, that's what you see. If we even see a couple of indicators that bring that into question, we take that very seriously. We do not take this for granted. We take it very seriously. So the preliminary Michigan reading, it's a preliminary reading.

it might be revised. Nonetheless, it was quite eye-catching, and we noticed that. We also noticed that the index of common inflation expectations that the board has moved up after being pretty flat for a long time. So we're watching that, and we're thinking this is something we need to take seriously. And that is one of the factors, as I mentioned, one of the factors in our deciding to move ahead with 75 basis points. Today was what we saw in inflation expectations. We're absolutely determined to keep them anchored at 2%. That was one of the reasons. The other was just the CPI rating.

So if you saw a movement like that again, another tick up in inflation expectations, would that put a 75 or even 100 basis point increase in play at your next meeting? You know, we're going to, I'll just say we're going to react to the incoming data and appropriately, I think. So I wouldn't want to put a number on what that might be. The main thing is to get rates up, and then pretty soon we'll be in an area where we're, I think, as you get closer to the end of the year, you're in a range where you've got restrictive policy, which is appropriate, 40-year highs in inflation. We think that policy is going to need to be restrictive, and we don't know how restrictive. So I think that's how we'll take it.

Hi, Chair Powell, Neil Irwin from Axios. Thanks for taking our questions. The late-breaking kind of decision to go to 75 basis points, do you worry that that will make policy guidance a less effective tool in the future? And should we think of that as a kind of symmetrical reaction function if we start to get soft readings on inflation or if the labor market starts to roll over? To take your second question first, yes. I mean, I think, again, we're resolved to take this on,

but we're going to be flexible in the implementation of it. Sorry, and your question was guidance. So, again, the overall exercise is that we try to be provide as much clarity about our policy intentions as we can because we think that makes monetary policy work better. It's always a trade-off because you have to live with that guidance. And so you do it, and it helps a lot of the time. I frankly think this year has been a demonstration of how well it can work. You know, with us having really just done very little in the way of raising interest rates,

financial conditions have tightened quite significantly through the expectations channel as we've made it clear what our plans are. So I think that's been a very healthy thing to be happening. And I would hope that it's always going to be any guidance that we give is always going to be subject to things working out about as we expect. And in this particular situation, you know, we're looking for something specific, and that is progress on inflation. We want to see progress. We want to see. Inflation can't go down until it flattens out. And that's what we're looking to see.

And if we don't see that, then that's the kind of thing that we'll call, even if we don't see progress for a longer period, that could cause us to react. But soon enough, we will be seeing some progress at some point, and we'll react appropriate to that, too. But I would like to think, though, that our guidance is still credible, but it's always going to be conditional on what happens. This is an unusual situation to get some data late in during blackout, pretty close, very close to our meeting, very unusual to one that would actually change the outcome.

So I've only seen in my 10 years plus here at the Fed, I've only seen something like that even close to that one or two times. So I don't think it's something that will come up a great deal. Thank you so much for taking our questions. Colby Smith with the Financial Times. On the clear and convincing threshold for the inflation trajectory, what is the level of realized inflation that meets that criteria? And how is the committee thinking about the potential tradeoff of much higher unemployment than even what's forecasted in the CEP if inflation is not moderating, you know, at this acceptable pace? The second part you can get.

If, you know, what's the potential tradeoff with higher unemployment than even what's forecasted in the SEP if inflation is not moderating at an acceptable pace. Right. So what we want to see is, you know, a series of declining monthly readings for inflation, and we like to see inflation headed down. So, but, you know, and right now, our policy rate is well below neutral, right? So soon enough, we'll have our policy rate, let's assume the world works out about, like the SEC says, the policy rate will be up where we think it should be. And then the question would be, do you slow down? Does it make you, you know, you'll be making these judgments about, is it appropriate now to slow down from 50 to 25, let's say, or speed up?

You know, so that's the kind of thinking we'll be doing. And we'll be, again, we're looking ultimately, we're not going to declare victory until we see a series of these, you know, really see convincing evidence, compelling evidence that, inflation is coming down. And that's what I mean by, that's what it would take for us to say, okay, we think this job is done. Because we saw, and frankly, we saw last year, inflation came down over the course of the summer and then turn right around and went back up. So I think we're going to be careful about declaring victory. But again, the implementation of our policy is going to be flexible and sensitive to incoming data. Are you more concerned now that to bring down inflation it's going to require more than just some pain at this point?

Again, I think that I do think that their objective, and this is what's reflected in the SEC, but our objective really is to bring inflation down to 2% while the labor market remains strong. I think that what's becoming more clear is that many factors that we don't control are going to play a very significant role in deciding whether that's possible or not. And there I'm thinking, of course, of commodity prices, the war in Ukraine, supply chain, things like that, where we really can't, the monetary policy stance doesn't affect those things. So, but having said that, there is a, you know, there's a path for us to get there. It's not getting easier. It's getting more challenging because of these external forces. And that path is to move demand down, and you have a lot of surplus demand.

Take, for example, in the labor market. So you have two job vacancies, essentially, for every person actively seeking a job. and that has led to a real imbalance in wage negotiating. You could get to a place where that ratio was at a more normal level, and you would expect to see those wage pressures move back down to level. People are still getting healthy wage increases, real wage increases, but at a level that's consistent with 2% inflation. So that's a possibility, and you could say the same thing about some of the product markets,

where there's just excess capacity. and, you know, where the, really where the strong demand has gone into, sorry, where there's, where there's, capacity constrained, right? So you have effectively what we think of as a vertical supply curve or close to it. So demand comes in and it's very strong, and it shows up in higher prices, not higher quantities, not more cars, because they can't make the cars because they don't have the semiconductors. So in principle, that could work in reverse. When demand comes down, you could see, and it's not guaranteed, but you could see prices coming down more than the typical economic relationships that you see in the textbooks would suggest because of the unusual situation we're in on the supply side. So there's a pathway there. It is not going to be easy.

And, you know, again, it's our objective, but as I mentioned, it's going to depend to some extent on factors we don't control. Hi, Chair Powell. Thank you for taking our questions, Rachel Siegel from the Washington Post. So the new projections show the unemployment rate ticking up through 2024 is a higher unemployment rate necessary in order to combat inflation and what is lost if the unemployment rate has to go up and people lose their jobs in order to control inflation. Thank you. So you're right.

In the SEC, we have unemployment going up to 4. The median is 4.1%. There are, of course, a range of actual forecasts. And I would characterize that if you were to get inflation down to, you know, on its way down to 2%, and the unemployment went up to, rate went up to 4.1%. That's still a, you know, historically low level. You know, we hadn't seen, we hadn't seen rates, unemployment rates below 4%.