Powell in a Corner

The Federal Open Market Committee (FOMC), the policy setting arm of the Federal Reserve, is scheduled to meet on September 21-22. The statement issued following that meeting will have to acknowledge a hard reality: Economic growth is coming in weaker than forecast, while inflation is coming in hotter.

The action will be in how Federal Reserve Chairman Jay Powell explains the Fed’s intent to taper asset purchases, which he is trying to decouple from expectations for a liftoff in rates. This is at the same time that he has to grapple with the desire to move up rate hikes to 2022 by FOMC participants, as indicated in the Fed’s dreaded “dot plot,” which tracks individual forecasts. It has been used by a few FOMC members to amplify their views, especially when they differ from those of their colleagues.

Look for Powell to pivot away from improvements in employment, which could remain weak due to the Delta variant and Hurricane Ida damages, to improvements we have already seen in financial conditions and a decision to taper asset purchases. The Fed’s initial decision to intervene in financial markets in March 2020 was to prevent the COVID economic recession from morphing into a financial crisis, which is even harder to recover from. It worked. Financial markets are not only functioning, but many (myself included) fear that asset bubbles are emerging.

Powell has remained defiantly optimistic about the economy’s ability to weather new variants and deal with the inflation triggered by reopening businesses. There is still reason to believe that much of what we are enduring on the inflation front will abate, but that may not occur soon enough for the Fed to hold off on rate hikes. Powell has stated that inflation will either abate on its own, or the Fed will do the heavy lifting necessary to bring down inflation. The latter would be more painful for all of us but it is becoming more likely.

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