A disappointing Powell press conference

Stocks fell by about 2.5% during Powell’s press conference, perhaps because the answers were more hawkish than expected. A few observations:

1. Powell was asked whether, in retrospect, the recent monetary and fiscal policy stance had been too expansionary. It seems clear that the answer is yes, but Powell indicated that we would have to wait 25 years for future historians to answer that question. This is nothing new; the Fed never blames itself for policy mistakes in real time.

2. At one point Powell suggested that if real wages rise by more than productivity, the result could be higher inflation. In my view, the real problem is nominal wages rising by more than productivity—specifically by more than 2% above the rate of productivity growth. Not sure why he’s focused on real wages, which have not been rising. Is his mistake based on some sort of Keynesian model? (Most of these fallacies seem to come out of Keynesian economics.)

3. The big decline in stocks occurred around the time of the first question, when Powell suggested that the balance sheet might be reduced, and also that the effect of balance sheet adjustments was much less important than the effect of interest rate changes. Lots of people believe the balance sheet is unimportant, and hence I was amused to see stocks fall sharply in response to Powell comments about something that is supposedly unimportant.

4. The second downshift in stocks occurred around 3pm, when Powell issued several comments that suggested he is worried about economic overheating (as he should be.)

5. Powell indicated that he now expects even higher inflation in 2022 than what he expected in December. The Fed is still behind the curve, indeed even further behind than in December. Monetary policy is getting even further off course.

PS. Over at Econlog, I discuss Powell’s strange response to a question on FAIT, where he seems to abandon the policy.



19 Responses to “A disappointing Powell press conference”

  1. Gravatar of Effem Effem
    26. January 2022 at 16:57

    10y inflation expectations were basically unchanged on the day. Down 5bp from peak to close. I think stocks are reacting more to discount rate effects; which of course we shouldn’t care about.

  2. Gravatar of Don Don
    26. January 2022 at 17:09

    I keep hearing stories about companies scrambling for supplies and staff full shifts. Add in the chaos with energy prices and I don’t see how productivity can improve. Perhaps Powell expects real wages to fall faster than productivity.

  3. Gravatar of Rinat Rinat
    26. January 2022 at 17:44

    How could anyone possibly see a rise in real wages when a surplus of workers are pouring in from south of the border, or when all of their jobs are going to Southeast Asia.

    Nobody trusts the Fed. A bunch of quacks sitting on a pedestal. The only thing missing from this new age pseudo science is a pope.

  4. Gravatar of Jeff Jeff
    26. January 2022 at 21:02

    Sure seems now like the FAIT announcement was just an attempt to telegraph a “dovish tilt” using language that wouldn’t explicitly repudiate the 2% target. Sounds like they never contemplated the possibility of inflation running so far above 2 that they’d need another undershoot to balance it out. So much for words having meaning!

  5. Gravatar of Ken P Ken P
    26. January 2022 at 21:09

    The market definitely cares about number 3. There was a big drop when minutes came out but only thing new was that there are plans to reduce balance sheet not just taper purchases.

  6. Gravatar of Tacticus Tacticus
    27. January 2022 at 03:03

    What I found extremely odd was that stocks were up before the conference. Shorting the S&P and ARKK and going long VIX futures was incredibly easy money.

    Amusing to see Rinat complaining about ‘a surplus of workers … pouring in from south of the border,’ considering that every company I talk to wants the Biden administration to issue more visas because they can’t find enough employees.

  7. Gravatar of Michael Rulle Michael Rulle
    27. January 2022 at 06:50

    When I saw him use the “25 year” example I was flabbergasted. I have no idea what his message was—as it relates to his policy going forward. As I said on your other site, my interpretation of the “balance sheet versus interest rates” topic, was he seemed to not be fully committed to hiking next quarter—-(not that he should have said they would but how he said they were thinking about it)—-and that is why I thought the market took a drop.

    Oddly, the market spiked up at 1 minute past 2pm eastern when his statement was released—-S&P hit up 2% on the day. An hour later (was in the doctor’s office) it was down 1%. I may have been watching a replay—-but the first thing I heard him say was denying FAIT—-and saying 2 is the target going forward—-followed by his 25 year comment and what I perceived was a weak commitment on raising rates next quarter.

    I had no idea what he was doing. I don’t know what the market was expecting but whatever it was he did not deliver.

    I will chose to “give him a break” although he was incoherent. He still has to be confirmed—-who knows what audience he was playing too——but at least the market basically ended flat on the day—-and it’s up today—-so maybe no harm was done.

    He has bought a lot of goodwill—-so I will give him the benefit of the doubt in knowing he was incoherent——and just kind of blew it. I still believe he is far less hawkish than most market analysts think he should be.

  8. Gravatar of steve steve
    27. January 2022 at 06:55

    Rinat has the most insightful comments on this hideous blog.

  9. Gravatar of ssumner ssumner
    27. January 2022 at 10:56

    Tacticus, Rinat also said that Costa Rica adopted Bitcoin. 🙂

  10. Gravatar of Nick Nick
    27. January 2022 at 11:34

    Thug boy sumtard, and his thug academics are no match for the stud truckers and farmers. You will lose, you frail little commie punk.

  11. Gravatar of Ankh Ankh
    27. January 2022 at 13:41

    Unrelated, but this is the type of mental sickness that pervades American culture right now.


    Apparently a father can no longer give his a daughter a discounted price, or a free condo, in a building HE OWNS. Biden can get his son jobs he doesn’t qualify for, and presumably due to some future backroom deal, but Trump can’t give away property he owns.

    Blue cities = corrupt cities. Blue states = corrupt states.

    Take the red pill Americans before you live under the CCP.

  12. Gravatar of vince vince
    27. January 2022 at 16:42

    ssumner wrote: … Powell suggested that if real wages rise by more than productivity, the result could be higher inflation.

    If productivity and price of materials were both flat, wages increased 2 percent, and prices increased 1 percent, Powell would be correct.

  13. Gravatar of ssumner ssumner
    28. January 2022 at 10:46

    Vince, In that case the problem would be the 2% rise in nominal wages, not the 1% rise in real wages.

    Suppose productivity rises 1% and nominal wages rise by 20% while prices rise by 18%. Nominal wages are obviously the problem here, as real wages rose by only 2%.

  14. Gravatar of vince vince
    28. January 2022 at 12:26

    Yes, nominal is clearly the big problem there. In an ideal world, productivity increases should lead to *lower* prices.

  15. Gravatar of nick nick
    28. January 2022 at 14:43

    bully boy and ruffian Scott “CCP” Sumner is trying to create a social credit score for Americans under the guise of vaccine passports.

    He gets kickbacks from pharma and the CCP.

  16. Gravatar of Kevin erdmann Kevin erdmann
    29. January 2022 at 16:17

    Taking tips spreads literally, it seems they are pricing FAIT in, but expecting it to take more than 5 years. ?

  17. Gravatar of ssumner ssumner
    29. January 2022 at 18:23

    Kevin, I’m not seeing that. TIPS spreads should be somewhat below 2%, to offset the recent high inflation. But even the 10-year is still above 2%.

  18. Gravatar of Kevin erdmann Kevin erdmann
    29. January 2022 at 22:46

    It seems there is a bit of an upward bias in tips breakevens, so I would reference the typical range from about 2004 to 2014. Compared to that period, it seems the current 10 year spread is about at the same level, which is an average of a slightly higher 5 year break even and slightly lower forward 5 year break even.

  19. Gravatar of ssumner ssumner
    30. January 2022 at 10:11

    Kevin, It’s possible there is upward bias. But I’m not convinced, especially as the recent inflation figures have come in far above TIPS market expectations. The Fed has a lot of work to do in restoring policy credibility. The 14.3% NGDP growth in Q4 was insane.

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