CAMS Weekly View from the Corner - Week ending 11/3/23
November 6, 2023
“As for the Committee, we are committed to achieving a stance of monetary policy that's sufficiently restrictive to bring inflation down to 2 percent over time. And we're not confident yet that we have achieved such a stance.”
Chairman Powell, Post FOMC Meeting Press Conference November 1, 2023
Transcript Link: https://tinyurl.com/52bdbvny
This past week the Federal Reserve’s Open Market Committee met to set interest rate policy. As was expected by consensus there was no change in policy. Importantly, that included no change in the Fed’s long standing (decades) 2% Inflation Target as an overall policy objective.
We have addressed this objective endlessly in editions over recent years, in particular the previous two. We have done this in light of a narrative that had developed in recent years to varying degrees that the Fed would leave this 2% objective for a say 3% objective. There was never any substance behind this other than subjective narratives.
For a casual observer of Fed policy this may seem of little concern. To the contrary it is a big deal.
If the Fed were to lift to a 3% target objective they would effectively be throwing in the towel on their price inflation stance – not just in our current era but as an overall policy stance.
Price inflation is one of two mandates the Fed operates on. To lift to a 3% target would make them look like a literal paper tiger relative to their price inflation mandate. The dollar’s value would erode even more rapidly. For the citizenry, it would be terrible.
If you think we have income inequality now, overall wealth disparity and evermore a society of haves’ and have not’s (think evaporating middle class) you would look back on this era as the good ole days relative to overall participation in general wealth creation and societal cohesion.
Price distortions would erode if not eviscerate the middle class even more. A society without a robust middle class is a society that is knocking on hell’s door. It seems we are already knocking but 3% target shift would equate to pounding on said door.
50 Minutes – 18 Times
The press conference following the Fed’s interest rate policy meeting lasted 50 minutes. In reviewing the transcript there began to be a redundant theme emanating off the pages relative to nearly any topic/question addressed by Chairman Powell and that was their 2% inflation target. He consistently injected into X reply their 2% inflation target.
A quick review relative to how many times he offered this equaled 18 times. If you had a 50 minute conversation with someone and noted they offered the same theme 18 times in your short interaction surely you would walk away with an understanding that you got what was really important to them via their redundancy.
Along the path of the press conference Powell underlined the fact that they have a long way to go to achieve 2% price inflation when he brought up their favored price inflation measure known as Personal Consumption Expenditure – PCE Price Index for short. He noted how they have made progress but PCE remains north of 3% which is unacceptable.
All told the Fed did not raise rates last week which was expected but the real story is the Fed remains steadfast, as in unwavering on their 2% target while simultaneously underlining they have not met their goals to date in light of the PCE results as one example.
If you are looking for or expecting a near-term rate cut you may want to curtail that thought. Interestingly though, if not unbelievable, consensus walked away from the Fed meeting concluding no more rate hikes and in fact rate cuts could be coming if the economy shows signs of weakness.
They may be right if price inflation trends lower from here soon – emphasis on IF.
Enter Employment Report’s
On the same day as the Fed meeting ADP which is a very large payroll processing company released their regularly scheduled monthly increase in new payrolls. The number was just over 100,000 which came in relatively light.
Then on Friday the Bureau of Labor Statistics (BLS) released their monthly update reflecting 150,000 new jobs created which was less than the 180,000 expected. Additionally, the BLS revised lower the prior two month job gains (this is normal there are always follow-on revisions be it up or down) by 101,000 less jobs created than initially released.
This was enough to light the fire under the “weakening economy” banner to seemingly solidify the budding post Fed consensus view that no more rate hikes would be coming and with this the usual follow-on assumption that rate cuts would be coming sooner than expected.
Interestingly, this budding newest version of a now long-standing old narrative (price inflation dead/Fed done raising/Fed will begin cuts sooner than expected) ignored the percentage increase in Factory Orders nearly doubled the percentage growth expected released the day after the Fed’s meeting and press conference. In addition, in wrapping up October we seen 3rd Quarter Gross Domestic Product (GDP) came in at a 4.9% annual growth rate easily beating expectations.
Note our header quote from Powell whereby he offered they are not yet confident they have attained a sufficiently restrictive interest rate policy that will achieve their 2% price inflation objective. This is the very same press conference that consensus walked away from feeling no more rate hikes would be coming.
Got narrative? Powell and the Fed are unsure while the narrative is sure – yet again. Time will tell but this will be interesting. Thus far, the narrative(s) along the path of the previous two-plus years have been dead wrong.
Here is what we do know for sure: The Fed’s 2% target objective is steadfast, price inflation remains well north of 2% to current day and the economy remains in growth mode. None of that is screaming for imminent rate cuts.
Relative to whether the Fed is done with rate hikes in this cycle: That will depend on in-coming data which will need to reflect a notable and on-going reduction in price inflation along with an economic backdrop that is cooling. One employment report cycle that is a little lighter than expected will not suffice.
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
Comments