Fed chair laughs off economist fears over inflation

The last FOMC meeting shows that the Fed has a “glass half full” outlook on inflation, experts say
By Sam Bourgi
•
06 May 2024
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Fed chair Jerome Powell isn’t sweating about the latest uptick in inflation and is even laughing off some predictions.

In the press conference after this week's FOMC meeting, he said: “I don’t really understand where talk of a stagflation scenario is coming from... I don’t see the ‘stag’ or the ‘flation.’”

Lately, economists have been increasingly calling today's inflation a repeat of the 1970s stagflation triggered by OPEC’s oil embargo and the end of Bretton Woods.

Powell begs to differ, saying that today’s economy, where both inflation and the unemployment rate are below 4%, is nothing like the 1970s-era stagflation.

After the conference, analysts generally agreed that Powell struck a dovish tone despite having all the ammo he needed to be more hawkish.

“Perfect FOMC. As dovish as possible,” said macroeconomist Alex Kruger, referring to the Federal Open Market Committee’s April 30 to May 1 meeting.

(Central bankers are “dovish” when they prefer lower interest rates, usually with the goal of supporting employment and economic growth. They turn “hawkish” when their focus shifts to controlling inflation at the expense of higher interest rates.)

Naomi Fink, a global strategist at Nikko Asset Management, said Powell’s commentary signals that “the Fed remains in wait-and-see mode and not ruling out [rate] cuts altogether.”

The game plan is “unchanged”

There was optimism in the air following the Fed’s press conference as stocks rallied following steep losses to start the week.

“We see markets breathing a sigh of relief after the Fed meeting was less hawkish than feared,” Angelo Kourkafas, senior strategist at Edward Jones, told CNBC.

“The base case continues to be that rate cuts are delayed, but not necessarily derailed.”

“Let’s just say that going into this meeting there was a lot of bearishness and fear that he would come out more hawkish,” said Jeff Rosenberg, a senior portfolio manager at BlackRock.

“I think there is a lot of relief here that the chairman stayed true to what we have seen from this chairman. He has been very much one-sided, looking at the glass half full.”

That interpretation is shared by former New York Fed president Bill Dudley, who told Bloomberg that the central bank’s “whole game plan is basically unchanged.”

There was “no hint whatsoever of a rate hike, no hint that [the Fed’s plan] is not going to work.”

The commentary seems to have boosted investors’ confidence for multiple rate cuts this year. According to CME Group’s FedWatch Tool, markets are pricing in higher probabilities of rate cuts between September and December this year.

Those expectations were reinforced when investors noticed only minor changes in the Fed’s latest policy statement.

Reading the fine print

Bloomberg compared the Fed’s statements from the last two FOMC meetings, highlighting deletions in red and new material in blue.

The new language simply states “a lack of further progress” toward the central bank’s 2% inflation target, suggesting policymakers remain patient for now.

statement

According to the New York Fed’s Survey of Consumer Expectations, Americans have held their one-year inflation expectations steady at 3% for the past three months.

That means they generally expect a noticeable drop off from the March CPI reading of 3.4%.

Although inflation remains well above the Fed’s target, economists say it’s important to look at the factors driving the price increases.

“Mostly, it is shelter that has been keeping monthly increases in inflation on the high side,” said Moody’s economist Matt Colyar. In fact, gasoline and rent costs drove half of the increase in the March CPI report.

Beyond that, “We’re still seeing very stubborn service inflation,” according to Sarah House, managing director at Wells Fargo. “This is the element that the Fed has really focused on.”

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