Robert Eisenbeis is a former executive director and director of research at the Federal Reserve Bank of Atlanta, who over the years also worked at the Fed Board of Governors in Washington D.C. as well as at the FDIC, the Federal Deposit Insurance Corporation.
In fact he he worked under every Fed chair from William McChesney Martin all the way through Ben Bernanke. So, after the Fed has cut its key rate by 25bps for the second time this year, Bob has ample perspective on where monetary policy has been and what’s going to take its next step.
When Bob joins me right after Jay Powell wraps up his post-policy-meeting press conference, he quickly checks off the key points the Fed chair put on the table. First, that “the Fed is firmly committed to its dual mandate and that was a real point of emphasis.”
Second, Bob says, is that “despite a loosening of interest rate restrictions, he still viewed, and the Committe still viewed, policy as being mildly restrictive and I think that’s important to rembember,” as in essence it means Powell is saying the Fed “isn’t looking to jumpstart the economy in any way.” A big issue for the Fed is that it’s caught between a rock and hard place because inflation is going up and the labor market is going as the labor market weakens and “with only one policy tool you can’t simultaneously loosen and tighten.”
Bottom line, Bob says “one policy instrument can’t accomplish both the objectives and so (Powell) said there’s no risk-free policy at this point, there’s a risk to do everything…and that’s part of the reason why he softened and tried to dampen expectations that…’Oh, yes, now in December, there’s going to be another rate cut.’ He tried to put a pause on that view for that very reason.”
What would he do now if he were in charge at the Fed? “To be honest with you… I would tend give more weight to the inflation concern than to the labor market.” He says if the Fed wants to get inflation down to 2%, and it’s going the other way, “it’s time to put up or shut up.”
As for the Fed’s announcement that it’s going end its quantitative tightening, or QT, program, Bob says “we’re going to see a shortening of the maturity structure of their portfolio, and I think this implies a steepeing of the yield curve potentially, down the road.”
So dive and hear why he sees the FOMC not worried about over-target inflation and optimistic about why it will gradually come down. And why the Fed does not see the onfire stock market as a sign that inflation is anything but restrictive. Spoiler alert: Bob notes that Powell said it’s all about AI and “not an across-the-board, huge increase in the market.”
Fed committed to Dual mandate Policy that it sees still restrictive 00:02:05.780
No, nothing unexpected… I don’t… I don’t think so in this particular case. A couple things impressed me…. One was that, Powell, I think at least I counted 3 to 4 times where he reaffirmed and made it really clear that with all the discussion about rates and everything else, the Fed was still firmly committed to its dual mandate. And, that was a real, real point of emphasis. The second thing I would say is that he really was fairly clear that Despite a loosening of the interest rate restrictions, he still viewed, and the committee still viewed, policy as being modestly restrictive, and I think that’s important to sort of remember. We’re not looking at an attempt to jumpstart the economy here in any way.
Policy conflict: Fed chooses to salve labor market 00:03:46.070
They’re in one of these unusual circumstances where inflation is going one way, and they see a weakening in the labor market going the other way. So, in other words, they’re caught between rock and a hard place here, because on the one hand, inflation’s going up, labor market’s reasoning, moving in the opposite direction of full employment, and so with only one policy instrument, you can’t simultaneously loosen and tighten it. And so, it seems to me that the message that came across was, yes, inflation risks are going up, but employment risks are also of concern, and right now, at least on the margin, they’re giving more weight to the employment objective, and that’s the rationale for the cut in rate at this point. Keeping in mind, going back to my original point. That they still regard policy as being modestly restrictive, so this is… this is not a wholesale loosening of policy just to try to stimulate the labor market.
Fed Sees No Risk-free policy as Powell tries to dampen December rate cut bets 00:05:52.760
With rates where they are, it’s still above what they regard as neutral, and hence modestly restrictive. the argument. And of course, it’s very difficult, because as I… he made the point as well, that there’s, in this particular circumstance. One policy instrument can’t accomplish both the objectives, and so he said there’s no risk-free way to approach policy at this point. There’s a risk to do everything, and I think that’s part of the reason why he softened and tried to dampen expectations that, oh yes, now December, there’s going to be another rate cut. He tried to put a pause on that view for that very reason.
Fed policy faces several issues…Shutdown 00:07:24.150
Well, I think there’s two or three things at play here. First, there’s the government shutdown, and that played into, if things continue, that could put further downward pressure on the labor market, but they don’t know. They don’t know how that’s going to work out.
Mixed inflation trends significant tariff effects identified already 00:07:44.120
On the inflation side, he was fairly clear to point out that they viewed The goods… the inflation was…Up on the goods side. Services were flat, and housing was declining. The goods inflation… I thought it was interesting that they viewed tariffs as adding about 3 tenths of a percent in that range to the estimated inflation… to the inflation rate. Which, if you took that off of what they viewed as a 2.9% rate, got them down close to… he cited 2.3% was the number that he cited, and they said, that’s pretty close to our goal. And they viewed the tariff issue as a temporary phenomenon. Now, we know that they viewed other phenomena as temporary and turned out not to be temporary, but that’s another Story for another time.
Markets are on fire… and the Fed’s cutting rates! 00:09:25.370
He tried to downplay, in some respects, the increases in the market to the extent thata lot of the increase is due to relatively few firms, and a lot of them are right now pretty active, either in the AI industry and or, in the production of chips and everything necessary to support the AI industry and all the capital investment that’s going on in that side. It’s not a cross-the-board a huge increase in the market. It’s really relatively concentrated in some lower… some smaller segments, that are just on the rush right now. So he tried to downplay a bit the pressures from the marketplace at this juncture as determining what they were going to be doing. And he did note that there’s also on the horizon a number of major firms that were now announcing, cuts in the labor, demand. Big labor cuts. So, not everybody is quite as optimistic, when it comes to… they said… and the other distinction is that
AI Vs Dot -com 00:10:41.800
Compared to the dot-com Boom and bust. these… AI firms and the ones in that industry are actually ones making a profit at this juncture. So operating… that was not the case in the dot-com boom. So he is sort of drawing a big distinction between the market pressures that we see and the explanation for why it’s going up now, compared to the last time we had one of these booms, which I thought was interesting.
Uncertainty breeds differences in opinions 00:12:41.550
Well, I, I think…couple things that strike me about this. First of all, when you’re in these difficult times. It’s not unreasonable for… people to have differing views, and giving… give different weights to what they see, particularly when you’ve got inflation going in one direction, and the labor market going in another direction. And they have different preferences, different weights. And, if it were all that clear, there would be consensus. But this is, I think, testimony. to uncertainty. And I… I view, going back to the old definition of uncertainty, you know? Uncertainty is when you don’t know what the probabilities are of outcomes. Whereas risks are at least where you can assess the chances that you’ll get. When you’re in an uncertain world, you’re going to get lots of different views.
Two opposite dissents/ Mirans is not objective 00:13:44.000
I personally discount the… descent from the new member to the board, Marin, simply because I think he’s carrying the bucket of water for the president who wants a 1% interest rate. I think it’s more important to look at, sort of, the people who are on the other side who think maybe it’s time to pause, and and it sounded to me from the press conference that, Powell was certainly not Discouraged by the fact that people might want to pause.
End of QT will come with A shortening of maturities 00:15:16.570
Well, I… Paul addressed some of that, in response to a couple questions in the press conference as well. And he said that, essentially what they had done when they had blown up the balance sheet, increased the size of the balance sheet, they’d also increased the duration of the portfolio a lot longer That they normally would have, that they would normally like to have a shorter duration of the portfolio. And part of the reason was that, that they had added the purchase of mortgage-backed securities to the portfolio. Those MDFs, they’re going to let them run off. And they’re not going to repurchase them or replace them. The MBS will run off with a fixed size of the balance sheet. any reinvestment would take place in shorter-term securities. So, we’re going to see a shortening of the maturity structure of their portfolio, and I think this implies a steepening of the yield curve, potentially down the road.
More Fed action in the short end; yield curve steepening ahead 00:16:28.380
And then, of course, once the economy grows, they may end up having to add down the road to the portfolio as currency demand increases and non-reserve liabilities increase on the balance sheet. But… we’re going to see… Essentially. more Fed participation on the shorthand side, and we’ll see what happens from that, but I think it’s going to steepen the yield curve a little bit. I mean, the long is going to go way up, that’s not what I’m saying. I’m just saying that the short relative to the long is going to be steeper than it’s been recently.
Policy impact on mortgage rates is indeterminant 00:18:00.250
Well, history has shown that when the Fed cuts rates, it doesn’t necessarily mean a reduction in mortgage rates. There are times in the past when, in fact, mortgage rates have actually gone up. The Fed isn’t operating in that side of the part of the market, and so that’s going to be related to supply and demand, and everything else. It’ll be…Linked, ultimately, to the short-term rates, but there is not a one-to-one correspondence between movements in short-term rates and movements in mortgage rates.
I’d worry about inflation now - “it’s time to put up or shut up” 00:19:35.460
Well…to be honest with you, I would tend to… give more weight to the inflation concern. than the labor market concern at this particular point in time. Yes, the economy has slowed a little bit. There’s been a lot of uncertainty. We’re going to have to wait to see how things, work out. But… If you really mean you… that you have it a 2% inflation control, and it’s going the other way, and hasn’t… and it hasn’t reversed for some period of time, it’s time to put up or shut up. And, I think I would be more on the pause side, personally, at this juncture. If I were arguing or advising a Reserve Bank president.
The policy dilemma is short terms the Fed has not lost control 00:20:40.500
Inflation expectations are pretty well anchored, if you look out, over the horizon. So, in fact, This is a shorter term focus at this juncture, and if the inflation expectations started to deviate from where they are, then that’s another sort of piece of evidence as to what the confidence is in the market, but you don’t want to lose that confidence, that’s for sure.
