“No grounds for complacency”
My Notes: Powell Speech
As was widely anticipated, the FED hiked by 50 basis points (from 4.00% to 4.50%).
As usual, the statement release, as well as the rate decision, are released at 2:00 pm EST but this time we also have the FOMC Economic Projections. Here’s what I noted from them:
“The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.”
Quite a brutal change in the dot plot when you compare September (1st picture) versus December. (If you don’t know how to read the dot plot, it’s simple: each dot represents one member of the FOMC and each member places its dot where they personally think rates will be in a given year. The higher the dots, the higher the rates.)
The FED also expects inflation to remain above their target during 2023 (Core PCE inflation):
It is now 2:30 pm EST and the conference is starting. This is what I personally noted from the conference:
“The labor market continues to be out of balance”
“Inflation numbers for October and November show a welcomed reduction in the pace of price increases, BUT it will take substantially more evidence to give confidence that inflation is on a sustained downward path.”
“No grounds for complacency”
“We will stay the course until the job is done”
“We’re not at a sufficiently restrictive rate even with today’s move”
“Can’t say if we will move our peak rates again at the next dot plot”
“Goods inflation started slowing. Housing inflation still growing strong and the largest part of the Core PCE which is around 55% of the index is related to labor market wages inflation and that’s going very strong”
“The latest CPI report did nothing to change our dot plot”
“We made less progress than expected on inflation”
“We’re going into next year with a higher inflation than we thought”
“12-month Core CPI is at 6% which is three times higher than our 2% target”
“I wish there was a painless way - there isn’t”
“We will keep our inflation target at 2%”
My personal comments:
(Written at 2:09 pm EST): I think the initial bearish reaction in the stock market is fair, given how much higher the dot plot has gotten. Keep in mind, the market has been pricing around 4.75% to 5.00% as a terminal rate and now in the dot plot, we can see possibilities as high as 5.50% to 5.75% for 2023.
(Written at 3:17 pm EST): I think Powell did the right thing by coming in more hawkish than people expected. The market is still down from the start of the show at 2:00 pm EST but has retraced about half the decline, as we speak. Powell maintained his hawkishness during the entire speech and period of questions.
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Great read, well explained!