Key Takeaways From Powell’s Q&A Point at Hawkish Fed Over the MT

There are two important takeaways from today’s Powell’s Q&A at the Cato institute.

1. Powell is seeking growth below trend (which was also what the minutes said). This is because Powell wants the labour market to cool off. The reasoning behind Powell’s view is that if the labour market does not cool off, wage growth will accelerate and lift services inflation. Services are 75% of the CPI weights. 
   
   Data showing growth not slowing below trend is why I have been calling for 75bp this month. Looking ahead, we therefore need to be focused on signs that growth is not slowing because that could keep the Fed hiking fast even if core inflation is slowing.
   
2. In his concluding remarks, Powell noted that inflation was a global phenomenon, the first time since the oil shocks of the 1970s. He wondered if this was a one-off or if we were moving into an era of repeated supply shocks. This echoes one of the themes discussed at JH, namely whether the world economy is moving to a structurally more inflationary regime. See my JH review here.
   
   The ECB’s Schnable, for instance, said in her JH speech that we are moving to a structurally more inflationary regime. Specifically, she thinks the fracturing of the global economy in competing blocks has reduced the elasticity of global supply. As a result, she thinks monetary policy should ‘respond more forcefully to the current bout of inflation, even at the risk of lower growth and higher unemployment.’ Basically, the global balance of inflation risks has changed and that should be reflected in global central banks policies.
   
   In practical terms, Schnable’s view would translate into a higher R*.  Powell’s comments show he is thinking about it. 
   
   In terms of what Powell’s speech mean for this month’s FOMC, I don’t think we will see a higher R* in the SEP.  This is too important a change not to be preceded by speeches and public discussions by FOMC members.  But this could be a risk for December.
   
   Also, at no time during today’s Q&A did Powell push against a 75bp hike this month, which is roughly priced in. Given the Fed preference to avoid surprising the market, signs that growth is not slowing, and their concerns over a loosening of financial conditions, it suggests 75bp is likely.

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.

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