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Still Waiting For Fed Powell's "Whatever It Takes" Moment to Kill Inflation

At the press conference following the July 26-27 Federal Open Market Committee Federal Reserve Chairman stated that the current level of official rates is close to "neutral." That sent shock waves through the financial markets, pushing up equity prices and lowering bond yields based on the impression (a false one, in my view) that policy rates were close to their peak.


Chair Powell keeps arguing that the Fed is moving "expeditiously" raising rates to squash inflation. But Fed Powell has not yet had his "whatever it takes" moment, stating that the Fed will maintain a restrictive stance until it gets the inflation outcome it wants.


It is hard to predict when Powell will have his "whatever it takes" moment. Still, it's coming because by easing financial conditions and fueling more risk-taking with his misstatement, Powell made the fight against inflation much more arduous.


Also, there are several problems and inaccuracies with Fed Powell's assessment that official rates are close to "neutral."


First, a neutral policy rate only occurs when the economy is balanced. In other words, employers are not aggressively bidding up wages to attract workers, and the number of jobs available is generally above the number of people looking for work. Also, general inflation is modest and close to levels that are not a factor in purchasing and investment decisions. None of that exists today.


Second, a "neutral" policy is not a fixed number. It moves up and down based on current economic, financial, and inflation conditions. The same policy stance can't be characterized as "neutral" when inflation is 9% and also "neutral" when inflation is 2%.


Third, for monetary policy to be effective and credible, it must also be balanced, reacting equally to good and bad outcomes. In 2020, policymakers announced a new framework, promising to maintain an accommodative policy stance until inflation averages 2%. With inflation exceeding its preferred target of 2%, a credible policy response must promise to maintain a restrictive posture until inflation returns to 2%.


I bet Powell doesn't have his "whatever it takes" moment until after the mid-term elections in November. Yet by waiting, Powell will be forced to do what he is trying to avoid: move policy rates too much higher highs to break inflation.


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