Jerome Powell spoke and had a Q&A session with Catherine Rampell of the Washington Post in Dallas yesterday. Here is what I noticed.

In the opening remarks, Powell emphasized the idea that the economy is good, each meeting is not pre-determined, and that the committee is not in a “hurry to lower rates.” He said,

We are moving policy over time to a more neutral setting. But the path for getting there is not preset. In considering additional adjustments to the target range for the federal funds rate, we will carefully assess incoming data, the evolving outlook, and the balance of risks. The economy is not sending any signals that we need to be in a hurry to lower rates. The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully. Ultimately, the path of the policy rate will depend on how the incoming data and the economic outlook evolve.

The bond market and journalists took this as a cue that Powell is moving closer to a pause in December, but I read it more like Powell wants to keep the odds near 50% of a December cut (odds at 59% now) to represent neutrality among hawks and doves on the committee. Powell (and Goolsbee and Waller at least) know that to achieve a soft-landing, they must do something unusual which is to cut rates ahead of economic weakness while inflation is still over 2%. What I heard in the press conference last week and again yesterday is that Powell wants to cut rates back to neutral in a methodical way. He re-iterated that the Fed may want to slow the pace of cuts as they approach estimates of neutral (~3%), given that neutral is largely unknown. It tells me that Powell wants to keep cutting consecutively as long as he can get away with it (others in the committee likely disagree.) In a telling exchange, Powell defended why they are cutting rates in the face of strong economics.

Rampell: So you say that interest rates are still restrictive right now but if you look at the CPI numbers that came out recently or today’s PPI number. Core CPI is over 3%. I think when I looked, the one-month rate is higher than the three-month rate, which is, I believe is higher than the 12-month rate [Eric note: it isn’t], the economy is booming, the market is on fire. Core PPI came in above expectations today. Business formations is up. Why are we cutting rates? It seems like the economy is doing pretty well.

Powell: The economy is doing very well and that’s a great thing. We totally welcome that. But, look at the labor market. What we’ve seen is… A lot of the great data we’ve seen is because of the expanding supply side. Unemployment has moved up from 3.4% to 4.1%. By a significant number of indicators, it is still cooling. Our mandate is not for growth, it is for maximum employment and price stability. But, on the inflation data, we do see inflation continuing on that bumpy path I mentioned. Today’s reading was more of bump than we had expected, but I would say the broader trend if you look back over the last 18 months, we think that is still in-tact. We’re going to tear this report apart and look at all the details. We’ll get another report before the December meeting. We’ll get another labor report. We’ll get the final numbers for October by the end of this month. We’ll look at all that and make an assessment. We do believe policy is restrictive and again, I would point to the labor market but its not clear how restrictive it is. It is a very fair point and we are well aware of that. I think we are mindful of the risk that we go too far, too fast, but also of the risk that we don’t go far enough. It doesn’t seem like that’s where we are either. It seems like we are right where we need to be. I do feel like the U.S. economy is in a very good place and I feel like our policy is in a really good place. We’ve got a lot of space to cut rates if the economy weakens. In the meantime, we can take the process of reducing rates, we can be careful about that. That’s what we are planning to do.

Aside from Powell reminding that the labor market is weakening, he let slip that he thinks the economy will weaken further with “in the meantime.” Powell knows the business cycle. He is on the most-dovish side of the FOMC in trying to achieve a soft landing by cutting ahead of economic weakness, but a significant part of the committee is more traditional; wanting clear economic weakness to cut rates. Powell is trying to stay in the middle and hence the slightly hawkish language. As characterized in a Bloomberg article on Tuesday, Neel Kashkari (Minneapolis) explained that the bar for a December pause is high,

Asked what could cause policymakers to pause next month, he said: “There’d have to be a surprise on the inflation front to change the outlook so dramatically.” “If we saw inflation surprises to the upside between now and then, that might give us pause,” Kashkari said Tuesday at the Yahoo Finance Invest conference. “It’d be hard to imagine the labor market really heats up between now and December. There’s just not that much time.”

Susan Collins (Boston), was slightly hawkish in a Wall Street Journal article this morning,

Another rate cut in December is “certainly on the table, but it’s not a done deal,” said Boston Fed President Susan Collins in an interview Thursday. “There’s more data that we will see between now and December, and we’ll have to continue to weigh what makes sense.”

But also,

Collins said she didn’t see any evidence that inflation was picking up due to new sources of strength in the economy, aligning herself with a view Powell expressed last week. Both of them suggested recent inflation stickiness has instead been an echo or “catch-up” effect of large price increases from the past few years, such as car insurance costs rising to reflect past increases in car prices that have since subsided.

“As far as I can tell, I do not see evidence of new price pressures,” said Collins. Firmer inflation in recent months instead reflects “the effects of the longer-term dynamics of past shocks,” she said.

Then Austan Goolsbee (Chicago), in a CNBC interview this morning was dovish; generating a Bloomberg story article headline of Fed’s Goolsbee Says ‘Rates Will Be a Lot Lower’ in 12-18 months.

The bottom line is that I don’t get the sense, as others think, that there is a new rush from the Fed to run to the other side of the boat to reverse what they’ve done. The Fed’s recent comments are just catching up to what’s already happened; economic data improved a lot since early August (see chart below.) The Fed doesn’t have to be too worried about inflation now because the bond market already tightened policy for them with an average of 86 basis points of higher rates across the yield curve in the last two months. The bond market is now pricing the Fed to only cut down to 3.92% in this cycle (SOFR futures), well above what anyone considers to be neutral, and just 70 basis points below the current level. The terminal level of rates has become more important than if they cut in December or not. In the last SEP projections (09/18/2024), the FOMC thought neutral was 1% lower at 2.9%.

This morning’s retail sales data had a prior upwards revision which revised my index up about 0.05 making the past look stronger, but the weaker number in October along with falling Industrial Production caused the index to fall about 0.5, making it a wash. Combining the current number with past revisions, Retail sales ex. auto rose 0.34% from the number we knew last month, which is exactly what was forecasted. My index is now lower than it was at the end of October. The 2-year may rise a bit more to find a top, but it is getting awfully cheap.