I'm not a macroeconomist. But I have watched his last half dozen presentations, the entire hour typically, start to finish.
I'm neither a lover nor a hater of JPOW, I will try to summarize fairly, and make it clear where it's my opinion/notes/observations/commentary being interjected
Some notes (my commentary in parenthesis):
- The rate hikes have slowed. 0.5% instead of the "normal" 0.75%. (Consumer-facing mortgage rates have been trending down for a month, in anticipation of this)
- There's substantial lag time between when the Fed changes that benchmark rate, and the effects are fully felt in the economy in a way that shows up in the numbers he and his pals look at. So the current numbers aren't a reflection of the last 0.75% rate hike, they are a reflection of several rate hikes ago, like back in the spring when this all started. This part is important, so I'll say it again: when JPOW looks at the latest inflation numbers, he's not attributing it to the latest rate hikes, he's attributing it to 3 or 4 rate hikes ago.
- JPOW says that the historical record spells out that the consequences of backing off too early are greater than the consequences of continuing with the rate hikes a little too long. Worth noting, he came of age and many of his "core memories" (if you know, you know :P), forever shaping his world view, would have coalesced in the early 1980s when he was working in finance and watching stagflation/"Reaganomics" play out in real time.
- Together, that means that when JPOW sees inflation/economic data he approves of, he will likely CONTINUE to raise rates several times more, just to hammer it home, and be sure that they've truly broken the back of inflation.
- He holds three opinions/beliefs that defy "common" understandings.
1) Current inflation is NOT being driven by all the money printing and/or gov't spending in 2020/2021, in the way that "common wisdom" holds money printing as leading to inflation. It's being driven by a) supply chain disruptions, which are largely resolving themselves, and b) a labor shortage of 4m people (4 MILLION less workers than there "should" be). That 4m is mostly excess retirements (the "great resignation" isn't millenials quitting jobs to sit at home and spend welfare money on avocado toast, it's the 55 year olds that retired in 2020, rather than working another 5-7 years), followed by (these two are tied) a staggering decline in net (legal) immigration to the United States, and COVID deaths. All of this since March 2020, and relative to looking at 2015-2019 numbers and just projecting forward. The Fed's job isn't to tell congress what to do, but he did in fact at Brookings (2 press conferences ago, the most recent one being at the Fed) call on Congress to increase "labor force participation," which either means bringing people back from the dead, forcing grandma out of retirement, or allowing for more (legal) immigration.
2) In particular, he feels that wage growth is driving current inflation. Grocery inflation is 10% and overall inflation 7%. So most people think pay raises "should eventually" track with some number around 7%, but he says restrictive policy will be needed until wage gains are "consistent with" 2% inflation. He's been asked what "consistent with" means, and refuses to give a number, but it's clearly a number closer to 2% than to 10% or 7%, from what he has said (stuff like "well you have to adjust it from 2% a little bit to account for various factors"). He's hammered home that there are 1.7 job openings for every job seeker, time and time again, which signals to him that he has PLENTY of leeway to keep increasing rates (the normal "check" on how far you can raise rates is that it tends to increase unemployment, but he's got PLENTY of wiggle room to play with there, in his view). He's projecting unemployment to increase from mid 3s to high 4s, which represents 1.3m to 1.5m job losses (he sticks to the % unemployment rate, but journalists and myself keep multiplying by labor force participation rate to express it as a number of job losses - he has never "corrected" a journalist for asserting target job losses to be in the 1.3m to 1.5m range, so both he and the journalists agree on the number, JPOW simply chooses to use unemployment %, while journos use unemployed persons in the millions rather than a %). The balance of power in the labor market, currently, favors workers too much, and it needs to be shifted in favor of employers.
3) Placeholder. I can't remember what I was going to say here.
Relevant to this community, he stated at his last meeting that into 2023, "housing services inflation" (aka rent) will continue to be high, into 2023, and then slow down (due to typical leases being 1 year, there's more lag time here than in other areas of measured inflation). So whatever your most recent % rent increase have been, don't project being able to get away with that in 2024, 2025, etc.
He also has said, MANY times, that the Fed's goal is "below trend economic growth" for the United Stats, 0.5% GDP growth next year being a number he tossed around at the latest press conference.
Phew. I've been doing a tiktok series that lots of people seem to like (getting 1m views on a video, on tiktok of all platforms, while being a balding middle aged man staring at a camera and talking about central bank rate policy, is not a small feat!), far more in depth than this post. @californiamortgage. The most common question I've seen in comments was "why can't we have a period of 'catch up' wage growth, to keep pace with inflation," which is did answer recently when asked by a journalist.
I personally have not been happy with how CNN, etc, have been covering his press conferences and presentations. Everything above is directly from his mouth in public comments, but you see basically NONE of it in the media!
