Powell told us policy is going to create a recession, but soft peddled it enough to leave markets to figure that out for themselves. After all, the FOMC is still very much in the clench of a dance between its objective to lower inflation and its desire to keep markets from crashing. Having to suddenly ease because markets seize up is not a corner in which they want to find themselves. Still, throughout the press conference Powell said a soft landing is increasingly difficult because of inflation factors out of their control, yet whether in control or not, the Fed “must find price stability in this new world”. To underscore his point, he said that several months of compelling evidence of falling inflation is required before believing “job done”. Inflation is a lagging indicator. Consequently, weak growth and rising unemployment will not stay the Fed’s hand if disinflation fails to materialize at the same time (it won’t).
The Fed has also finally ceded the idea that they are tighter than the spot funds rate because the yield curve prices in the forward communication of the funds rate trajectory. I have argued against this view for some time, citing carry costs for inventory in the nonfinancial world, and it looks like Powell has finally caught on. He admitted that recession is not arriving with the funds rate still in deep negative territory. Yet, he also tells us that policy only needs a mildly restrictive funds rate (3.5%-4.0%) in 2023 to get growth lower and inflation halved. He knows better, but dancing is not easy when desire keeps stepping on your toes.
If a recession is not imminent, and I agree with Powell that it is not, the rate trajectory in the SEP is a soft-landing fantasy, though less of one than what was released in March. One can see a quarterly recession and too high inflation co-existing inside these annual median forecasts. On the other hand, the current economy is slowing, and one must consider the possibility that the Fed’s growth outlook will be as off the mark as their inflation outlook of a year ago. No one ever went broke fading a Fed forecast. My Q/Q growth forecast for real GDP in the current quarter is 2%, towards the bottom of the consensus band centred at 3% -- the Atlanta Fed GDPNow model is at 0%.
The economy is slowing. Initial unemployment claims are drifting higher but remain well within levels reflective of a strong labour market. Powell talked about job openings as his key metric for the extreme imbalance between labour demand and supply, Our high frequency data on job openings from Global Data strongly imply that a sharp drop in openings will be evident in the next few JOLTS reports. Again, weaker openings but still at high levels relative to the past several years. This is all part of growth downshifting from Covid-boom to something akin to the new trend. More problematic is weakness in railcar loadings of cyclical cargo (Chart 1) compared to the years prior to Covid. If this was just a Covid boom-slowdown cycle, railcar loadings should not necessarily be weaker than 2016-19.