Jeffrey Lacker, former president of the Federal Reserve Bank of Richmond, is impressed by what the Fed didn’t do at its meeting today and what Chair Jay Powell did say at his press conference at the today’s press conference.
The possible decision of the policymaking Federal Open Market Committee to hold its key rate steady even as two prominent Fed governors dissented in favor of rate cuts had created some drama in the days ahead of the meeting. But Jeff says that the focus quickly shifted to Powell’s views as he stressed the fact that inflation is still above its 2% target and the risk now is that tariffs may push prices even higher.
”I think the big news is what he didn’t do at the press conference,” Jeff said. “What he didn’t do at the press conference was provide any smidge of a hint, of a whiff of a September rate cut. He didn’t put it on the table.”
So dive in and hear what Jeff has to say about why the Fed may not cut rates at all this year. And why he thinks the economy is on solid ground now and may stay there.
Good Q2 for GDP solid first half some consumer slowing 00:01:15.520
So the GDP report really has to be interpreted, together with the 1st quarter report. I think Powell was right about that. You put them back to back together, because there was a big swing in imports that surged in the 1st quarter and then collapsed in the second. And they're back now to where they were in 4th quarter, or at least net exports are. So you take that out, and you look at the 1st half as a whole, and for sure, growth is slowing a bit. So consumer spending growth is slowing noticeably. That's sort of the main area of slowdown. It's not a big slowdown. It's not the beginning of a recession necessarily, by any means. So, it gave them something, I think, in the meeting they would have hung their hats on. I think they would have pointed to the areas of weakness in the report, but I think on the other side, others could have reported, you know, pointed to sustained growth in business investment and everything else kind of looking okay? And then the labor market as a whole is is just solid, as Jay said, so. I don't see it as having a big effect on the meeting. So you know, it's interesting data, though.
The Fed has an inflation problem 00:03:10.550
I don't think it's warranted <a rate cut>. I certainly wouldn't have voted for a cut today, and I think that the majority stance of wanting to wait and see is the right one. I think that they just don't know enough about how tariffs are going to affect inflation and take tariffs off the table - inflation is running too high by a sizable amount. It's over 2 and 3 quarters (percent), essentially, you know, at a run rate. And this after they've cut 3 times late last year, and disinflation stalled out essentially. So, they've got an inflation problem. It's not at all clear. They have a growth problem at all. The slowdown in labor market growth, Slowdown in consumer spending that's consistent with a huge drop off in net immigration which bolstered net immigration was a big driver of labor force growth a couple of years ago, and is no longer doing that now. And so I think you ought to expect some slowdown in GDP growth. But they have an inflation problem. It's not back to target. And it's been a while now, and they pivoted towards ease last year, and the disinflation they were hoping they had some momentum on just hasn't materialized. So they've got an inflation problem they need to think carefully about. And I think the majority is focused on that and inclined to just stand pat for a while.
No policy hints no leaning from Powell 00:05:16.240
On growth and inflation. I think he said the things you'd expect him to say in the way you'd expect him to say it. I think the big news is what he didn't do at this press conference. What he didn't do was provide any smidge of a hint of a whiff of September rate cut. He didn't put it on the table. He didn't allude to it. No turn of the dial there. They could do it. They could cut in September, and he has time between now and then to signal it and for the data to signal it. But he didn't make any moves in that regard. And that's I think that's why you saw the 2 year the 10 year rates go. Treasury yields. Go up after the press conference began, and I think that's why, if you look at the futures markets last time I looked a few minutes ago, they'd flipped. and the a rate cut is no longer the most likely outcome for September. It's sort of a 60, 40 kind of thing, but I think that's the big news, the big takeaway from the meeting, you know, if you read, pour over the tea leaves, it's what he didn't do to signal a September rate cut.
Is the Fed still thinking rate cuts and recalibration? 00:07:20.450
Yeah. So I think the thinking there is that there's enough downward momentum on inflation coming that they can get to neutral within a year or so, and that neutral is lower than where they are now. So both of those things, I think, are open to question. I don't think the committee is 100% sure of those. And I think there's commentary that places more confidence on those propositions than they ought to. So the idea that the neutral rate is 3 and a half now rather than 4, 4 and a half. We just, you know, that's just a statistical guess, in a way, and it's there are wide confidence bands around that estimate. And, as Jay Powell said, you know, at the end of the day you look at econometric estimates. But you also look at its works. You know our star by its works, and if inflation isn't coming down, then you're not restrictive enough. So I think that's going to weigh heavily on them. If they don't see more progress on inflation on the tariff front.
Tariff dynamics will be slowly revealed/ no rate cuts this year? 00:08:23.960
it's clear that the tariff implementation is going to be, it's become much more delayed than it looked like after the April, the beginning of April, and the Liberation Day tariffs. So the tariffs are going to come later. It also looks as if that the pass-through the effect on consumers is going to be more delayed and stretched out than we thought. It looks like firms are not raising prices in anticipation of tariffs on incoming goods. They're pricing the goods they have, and that they got in before the tariffs hit. They're pricing them at no tariff prices as tariffs come in and apply. It looks like they're raising prices. It looks like they're pushing some on the consumer. They're eating some. They're making their suppliers eat some. But all of those that division of who bears the cost. That's going to be a very fluid thing. If the tariffs are going to last a while, you're going to expect you should expect to see more lasting adjustments that could involve the suppliers, saying, No, no, we can't bear this. We can bear it for a few months, but not forever. We need our price back, and the same thing with the intermediaries, the firms that are bringing them in and selling them, passing them on at wholesale and passing them on to consumers. They're eventually going to say, well, we need to cover our costs at some point, and you're going to see those pass on. So it looks as if the process of tariffs hitting the economy is going to take longer, to be more drawn out than expected. Now, sure, it's possible that that turns out to be a one-time level effect, but that's uncertain, too, as Jay Powell emphasized today. And I think rightly. So. so yeah, it's going to take longer to figure out whether rate cuts are warranted, and I think people ought to be thinking that there's a good a good chance that there aren't any rate cuts this year.
Want a one-time price pass-though? The Fed must make it happen 00:11:48.600
Yeah, one thing that chair, Powell said today that I think was noteworthy, and I very much admired and was glad to hear him say is that the base case of a 1-time level effect on prices, and then inflation comes back down to its previous trend, that the fed has to make that happen. that the alternative is for a price level, an inflation increase driven by tariffs to pass through and to become part of expectations. And then there's second round effects, and 3rd round as people catch up, and then the catch up in wages passes through to prices again, and you get a surge of inflation. He said that he said that their job at the Fed is to prevent that from happening to make it a one-time level effect, and I thought that was very astute of him to warn markets that hey level effect that could be true. But the fed has to make it true. It just doesn't happen by itself.
The Fed is beginning to appreciate what it is that it does not know 00:14:44.410
At this point people, I think, have a very serious appreciation, a deeper appreciation of the uncertainty about the path ahead than they did before, and I think the June CPI report that where you saw some indications that categories likely affected by tariffs were picking up steam. I think that gave them a sense that all right. Now, I think here's what the trajectory could look like but we still don't know. There's a lot we still don't know. I think they're they've arrived at the summer, knowing less than they thought in January. They would know in the summertime. So yeah, I think a deep appreciation of the extent to which things could break in a bunch of different ways, I think, is top of mind for them.
Powell watches the unemployment rate; I watch the hiring rate 00:16:48.400
So I mean, you look at everything but the ones that would flash bright red would be a fall in hiring rate. Because if you if you sort of decompose how unemployment goes up in a recession, what? What pushes the labor market into a deteriorating spiral, it's usually firms just stop hiring layoffs come a little later. And so those 2 things are, I think, are really crucial. Job. Opening rates is part of that. But no. you know openings can wiggle around for a bunch of different reasons. But I think the layoffs and lack of hiring are signals that you got a major deterioration, and those are those are in the ballpark of a healthy job market, chugging ahead, I think, and. It's tiny, I mean, what if they've deported what like 150,000 something around there so far this year? And the job market creates like 5 million new jobs a month and destroys 4 or 5 million jobs. You know, there's 4 or 5 million separations every month, and so compared to the churn in the labor market, that's like. you know. Well, over a hundred 1 million. It's tiny same thing with Federal layoffs. I mean those you know, you can see in the GDP. Report that non-defense Federal spending fell pretty dramatically 11% at an annual rate in the second quarter, so you'll see it there, but you know, so far that's not been big enough to leave a dent in the aggregate market.
Consumers pull back from big spending in H1 00:19:39.140
The picture of the consumer sector over the 1st half of the year is one of rising uncertainty and a pullback from commitments less willingness to spend big bucks at a restaurant, and that kind of thing. So a shift to a more conservative stance in consumer spending, and I think leisure and hospitality would be slowing down would be part of that consistent with that.
The economy is slowing not sinking 00:21:13.250
Yeah. So the weakness in growth, the softness in growth, the softening of growth in the 1st half. I think, is a little more marginal, a little smaller than in sort of significance than a lot of analysts seem to think. And I think the fact that inflation is holding up at around, you know, above 2 and 3 quarters is more significant for the Fed's policy objectives than people think. So that's I think that's why I differ from sort of what the market's price again. They've been for the last year or 2. They've been fairly optimistic about rate cuts more optimistic than you know it turned out they should have been in a lot of cases. So I think the market tends to get ahead of itself on rate cuts. So Just my 2 cents, though. So, you know, it's a big, it's a free, country. People can make their own choices.
Jeffrey Lacker
Jeffrey M. Lacker is a Senior Affiliated Scholar at the Mercatus Center at George Mason University, working on monetary policy, payments and central bank governance.
Dr. Lacker was president of the Federal Reserve Bank of Richmond and participant in meetings of the rate-setting Federal Open Market Committee from 2004-17, including rotations as a voting FOMC member in 2006, 2009, 2012 and 2015. He cast eight votes dissenting from FOMC decisions in 2012.
Dr. Lacker joined the Richmond Fed in 1989 as an economist in the research department, becoming senior vice president and director of research in 1999. He was an assistant professor at Purdue University from 1984-89 and was distinguished professor at Virginia Commonwealth University from 2018-22. He holds a PhD in economics from the University of Wisconsin-Madison and has published widely on monetary and payment economics.
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