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Below is the full text of today's FOMC statement, including my comments.
Overall economic activity appears to be recovering after a modest decline in the first quarter. Job gains have been solid in recent months and the unemployment rate remains low. Inflation remains high, reflecting pandemic-related supply-demand imbalances, higher energy prices, and broader price pressures.
Sell: While the above is somewhat accurate, there are numerous examples of inflationary headwinds coming from retailer earnings, slowing reported retail sales, historically low consumer confidence, CEO guidance, etc. Additionally, we are likely at a literal tipping point in employment, so the above sentiment seems a bit backwards at this point.
Russia's aggression in Ukraine is causing enormous human and economic hardship. The aggression and related events are creating further upward pressure on inflation, weighing on global economic activity. In addition, COVID-19-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is paying very close attention to inflation risks.
Sell: There is no doubt that the Ukraine issue and ongoing COVID disruptions are contributing to the inflation we are seeing, but the above statement is a huge mistake and shows a pretty serious lack of judgment.
This theory is quickly becoming a new “temporary” or “peak inflation” farce as the Fed looks to clearly temporary circumstances as an explanation for the inflation we are now seeing. Note that the Fed's reference to “additional upward pressures” suggests that these temporary circumstances are only part of the explanation for inflation and does not point to other factors.
This is a dangerous move given that inflation will likely continue beyond these temporary circumstances, or that these disruptions could cause inflation to rise beyond what can be reasonably explained, making the Fed once again appear unprepared and out of touch with economic conditions.
Clearly, the instigator of inflation that the Fed wants to avoid highlighting is plain and simple monetary inflation that they themselves created through 13+ years of reckless quantitative easing (QE) and zero interest rate policies (ZIRP).
Unless the Fed, and especially Chairman Powell, truly acknowledges the reality we face, the Fed is doomed to forever fall behind in terms of trust and credibility.
The Committee seeks to achieve maximum employment and 2 percent inflation over the longer run. To support these objectives, the Committee decided to raise the target range for the federal funds rate to 1-1/2 percent to 1-3/4 percent and expects that continued increases in the target range will be appropriate. In addition, the Committee will continue to reduce its holdings of Treasury securities, agency debt, and agency mortgage-backed securities as described in the plan for reducing the size of the Federal Reserve's balance sheet announced in May. The Committee remains strongly committed to returning inflation to its 2 percent objective.
Sell: This is a strong statement overall as the Fed is signaling intent to continue moving forward with its balance sheet normalization plan, but the range for the fed funds rate is very small compared to the latest inflation figures.
Here are the inflation rates as of April:
Consumer Price Index (CPI) 8.5% Personal Consumption Expenditures (PCE) 4.9% University of Michigan inflation expectations 5.4%
Keep in mind that all of these data points are slightly lagged and likely only capture the strength of inflationary pressures due to the recent increases in energy (especially gasoline) prices. To hit the 2% target the Fed currently desires, the Fed's federal funds rate would need to move pretty close to the prevailing rate of inflation.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor incoming information for its impact on the economic outlook. The Committee stands ready to adjust the stance of monetary policy as appropriate if risks arise that could impede the achievement of the Committee's objectives. The Committee's assessment will take into account a wide range of information, including data on public health, labor market conditions, inflation pressures and expectations, and financial and international conditions.
Voting for the monetary policy action were: Chairman Jerome H. Powell, Vice Chairman John C. Williams, Michelle W. Bowman, Lael Brainard, James Bullard, Lisa D. Cook, Patrick Harker, Philip N. Jefferson, Loretta J. Mester, and Christopher J. Waller. Voting against the action was Esther L. George, who preferred to raise the target range for the federal funds rate by one-half percentage point, to 1.5 percent to 1.5 percent, at the meeting. Patrick Harker voted as an alternate at the meeting.
Selling: Esther George appears to have concluded that a 50 basis point hike would be sufficient given that the full effects of the last two hikes have not yet been felt, or perhaps the clear impact of this latest hike on financial markets, but in any case, the general consensus was that a larger hike would be desirable.
Frankly, given that the “inflation physiology” is in full swing among the general public, the Fed should have delivered another significant rate hike of +100bps or +125bps. Coming into today's meeting, the Fed was clearly behind the curve. At best, they seemed willing to put up a fight after the meeting, but with inflation raging and the narrative totally shaky, I really don't think today's announcement really showed them catching up.