My added emphasis throughout.

Yesterday, Jerome Powell sat down for a live Q&A with the President of the NABE (National Association for Business Economics), Ellen Zentner, at their annual conference. Powell had a strong bullish tone and spent much of his time trying to warn the bond market that too many cuts were priced-in. Powell’s comments corroborate what I have been writing about; that a recession is coming, but it isn’t here yet. I continue to think the 2-year is overpriced/too low in yield because of this. If you want to understand how the Fed views the economy, this is a great interview to watch (45 minutes), but I will summarize it with five quotes.

1. He wanted to take away some expectations of Fed lowering. In the opening speech, Powell was optimistic about the economy and said there is no pre-set course for lowering rates. He said,

POWELL: Looking forward, if the economy evolves broadly as expected, policy will move over time toward a more neutral stance. But we are not on any preset course. The risks are two-sided, and we will continue to make our decisions meeting by meeting. As we consider additional policy adjustments, we will carefully assess incoming data, the evolving outlook, and the balance of risks. Overall, the economy is in solid shape; we intend to use our tools to keep it there.

2. He explained some major bullish revisions for the economy. When asked what has happened since the September meeting, Powell explained that the prior gap between GDP and GDI was eliminated with the BEA’s annual revisions. GDI (gross domestic income, the income/receiving-side of economic output) had been lower than GDP (gross domestic product, the spending/outgoing-side of economic output) for the last couple of years. These two series should match in theory, but they hadn’t for a couple of years. This led to some economic prognosticators to think that GDI was telling the real, weaker story of the economy (example). But, upon these revisions (9/26), GDI was mostly revised up to meet GDP.

POWELL: Most of the data before our upcoming meeting hasn’t come yet, but I would say one thing worth pointing to is the annual NIPA revisions, which I thought were quite interesting. And I would point out a couple of things. There are two ways of measuring output in the economy….there are many ways, but two principal ways are Gross Domestic Income versus Gross Domestic Product, GDI versus GDP. There is lore and there is research that says that actually GDI gives a better real-time read and for the last year and a half; GDI has been quite low relative to GDP, raising, for those of us that forecast the economy, a risk that GDP will turn out to have been overstated and be revised down to meet GDI. So, that’s been a downside risk that we’ve been monitoring. And as this audience will well know, quite the opposite happened and there were very large adjustments, you know, revisions to GDI and there is now no gap between the two. In theory, there should be no gap; no statistical error in measurement. So, that, I would say, removes a downside risk to the economy.

Secondly, it has looked as though consumers were spending more than their income. We see Disposable Personal Income now being estimated up, removing what we had been thinking of as a possible downside risk that consumer spending might be unsustainable. So we look at that and again, very large healthy upward revisions to income.

ZENTNER:  So we had…income was revised upward and spending was revised upward, but income was revised upward so much more than spending that the savings rate came up even with greater spending.

POWELL: That’s right. Yeah, the savings rate too. So, we think savings are now, we think there are more savings on people’s balance sheet and the savings rate is higher so that speaks of more of kind of background that suggests that spending can continue at a healthy level.

3. He explained that the committee is not in a hurry to cut rates quickly. In response to a question about the Summary of Economic Projections, he said,

POWELL: This is not a committee that is in a hurry to cut rates quickly. It is a committee that wants to be guided, and ultimately, we will be guided by the incoming data, and if the economy slows more than we expect, then we can cut faster. If it slows less than we expect, we can cut slower and that is really what is going to decide it. But I think from a base case standpoint, we are looking at a process that will play out over time, not something that we need to go fast on. It will depend on the data; the speed that we actually go.

4. He explained that the data in hand would suggest 50 basis points of cutting this year, not the 71 basis points that the bond market has priced-in.

POWELL: We will do what it takes in regards to the speed that we move, but if you look at where we were two weeks ago, coming up on three weeks ago I guess, when we wrote down our SEPs and made our decision, it was a situation where people were thinking, you know, that the bulk of the committee was at 75 basis points or 100 basis points and the votes were on 50 and that would mean two more cuts, it wouldn’t mean more 50’s. Now that will depend on the data, but ultimately where the baseline is. If the economy performs as expected, that would mean two more cuts this year. A total of 50.

5. He squirmed out of a question about a soft landing.

ZENTNER: Do you think that the 50 basis points you delivered in September. That cut, you described as a strong start. Did that cut give you more confidence in a soft landing?

POWELL: [Long-pause] I would put it this way. It is a reflection of our confidence that inflation is moving sustainably down. Or, our growing confidence that it is moving sustainably down to 2%. You know, as I mentioned, our design overall is to achieve disinflation down to 2% without the kind of painful increase in unemployment that is often associated with disinflation processes. That’s been our goal all along. We’ve made progress towards it. We haven’t completed that task. I think you’ll see us using our tools in a way that shows our commitment to achieving that. I don’t want to make a judgement about its likelihood, I just want you to know that we are committed to using our tools to do everything we can to achieve that outcome.

ZENTNER : Well you know economists everyday are asked for a probability of a soft-landing. I try very artfully to avoid it, but I just have high hopes.

Think of how easy it would have been for him to say “yes” if he felt that way. This was a rare interview where the questions seemed live (he hadn’t seen them beforehand) and you got a real feel for what Powell and committee thinks. As I see it, the takeaway is that a recession is coming, but it isn’t here yet.