The Federal Open Market Committee today announced a 50 bp hike in the Fed funds target rate and the commencement of QT June 1. This is pretty much as expected, which itself is expected since the Fed is notoriously ascared of surprising markets.
The lack of hawkish surprises in the post announcement press conference is apparently being taken as dovish by the markets, with Treasury prices up modestly and stocks up less modestly … at this writing we’re looking at nine hundred Dow points. Powell guided expectations towards another fifty basis points at each of the next couple meetings.
Powell did his best to channel Paul Volcker, even mentioning him by name, and actually marginally succeeding. The foaming-at-the-mouth, bug-fucking crazy Jay Powell of a year ago has been abducted by the pod people and replaced with a sane central banker anxious to earn back his dignity. He might not only succeed, but even rescue his legacy from the disastrous policy that underwrote this inflation in the first place.
We could quibble with the decision. We’d have preferred 75 bp but can live with 50. Wait … better we’d have preferred 150 bp, along with a clear statement to the effect of “that’s all, folks” … “we’ll review the rate at each subsequent point and either hike, cut or hold as the data warrant at the time”. Of course the committee has kind of made such things difficult by conditioning the markets for years to expect only the expected.
So as a practical matter our ideal move may be a bit of a fantasy. But as long as we’re going down that road, we have to reiterate that the best rate policy is none at all. In contrast to many Fed critics, I don’t have much of a problem with QE, confined to Treasuries and gold, and would prefer to see it completely replace rate targeting as the Fed’s marquee policy tool. Probably because it’s been done so long, rate targeting has become accepted as normal, but that overlooks the incalculable damage it has inflicted on the economy.
Powell continues to irrationally cling to the use of “forward guidance” as a policy tool, and equally irrationally to the “2% inflation target” as if it had been handed to him on stone tablets. But I believe Powell when he says he’s declared inflation Fed Enemy Number One and think we can be grateful for the progress we’ve seen to date.
The tricky part is that, as the Fed seems to increasingly recognize, it has to go through asset prices to get to consumer prices. Powell himself acknowledged that today, albeit in the fuzzy terms of “financial conditions”. So in an example of what we might call reflexivity, today’s big post-announcement rally in asset prices actually works at cross purposes with the progress the Fed seeks. If it continues, the Fed will find it must become more aggressive to achieve the victory it seeks, in which case the predictability it so cherishes may have to be the next thing to go.