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“Fed Speak” Translated

“Fed Speak” Translated

February 09, 2024

If you were a casual observer of the news the last two days of January, you may have heard the Federal Reserve’s “Open Market” Committee (FOMC) met to discuss inflation and the Fed’s reaction/non-action regarding interest rates, economic growth and employment.  Chairman of the Fed, Jerome Powell, holds a press conference on the last day of the meetings at 1 PM Eastern time to share the results.  To people not versed in “Fed Speak” his comments may sound like “Yes, we have no bananas.”  Let me try to translate their jargon.   


The Fed has, as they say, “a dual mandate.”  This means they have two jobs: 1) Keep inflation low; 2) Keep employment high.  The Fed’s target inflation goal is 2%.  Not lower and definitely not less than 0%.  If inflation is less than zero, this means that the economy is shrinking and the cost of goods and services are going down.  For my wallet, prices going down may sound like a good thing.  However, quite the opposite occurs for the economy on a whole.  Let me give you an example: if I am considering the purchase of a new car and the prices seem to be going down, I will be tempted to drive the old clunker longer and wait to make that new purchase at an even lower price than today. When people delay purchases, that is bad for economic growth.


On the flip side, when there is a shortage of products that people want to buy, the sellers of those products are able to increase prices.  This is good for sellers because the higher prices may mean higher profits …. as long as their cost to make the product remains the same.  Sometimes, this is the case.  However, if the manufacturer of the product wants to make more product to keep up with demand, they need more raw materials, components and employees.  Now, the people selling the raw materials start charging more money as a result of the increased demand.  This is inflation.


Now let’s discuss/translate what Jerome Powell said at his press conference on January 31, “We are looking for confirmation that inflation is moving sustainably to our target.” 


What Mr. Powell is saying is that “Is inflation stalled at the current level or will inflation continue going down to the target 2%?”


When asked by a journalist, “what do you need to see to gain the confidence you are looking for?”


Mr. Powell responded with, “We have confidence.  However, we are looking for greater confidence.”


What he means by “greater confidence” is “We (meaning the Fed Governors) are feeling pretty good that inflation has dropped from 9% to about 3.5%, but that is not good enough and we don’t feel the warm and fuzzy vibe yet.  Therefore, we are not cutting interest rates yet.”


To recap how we got into the current inflation situation, during the COVID crisis of 2020, the Fed cut rates to near zero to help prevent an even greater financial disaster.  When inflation got ugly (and some would say too ugly and too late) the Fed began to increase interest rates to fight inflation (this is what the Fed does).  Most of these rate increases were twenty-five or fifty basis points (ha ha, more Fed speak) --- this really means 0.25% to 0.50% or one-quarter to one-half percent.


At the June 2023 Fed meeting, rates were increased to 5.5%.  The “Fed Funds Rate” (rate the Fed charges member banks to borrow money on a short-term basis) is still at this level today.  This rate ultimately flows through the economy to other borrowers which affects the cost of borrowing money or the rate you can get from your bank or money market.


Back to what Mr. Powell said during the last Fed Press Conference: “We want to see more good data.  Inflation is a good example.  We have had six months of good inflation data (inflation dropping from 9% to 3.5%).  This is a signal that we are on the right path, but we are not yet certain this path will get us to where we want to go.”


Translation: “We feel good about how much inflation has gone down. We need more data before we are convinced inflation will go down to and stay down at the 2% target before reducing rates.”


Now to add some historical context, in the early 1980’s inflation was at 12.5% and the Fed responding by raising the Fed Funds Rate to 18% which led to interest rates over 20%.  When inflation dropped quickly, the Fed reacted by drastically reducing interest rates immediately.  The result was a rebound to the high inflation levels.  With the lessons of the 1980’s about how reducing interest rates too quicky is a bad thing, the Fed will be slow to reduce interest rates this time around.


Now allow me to share with you my opinion/thoughts on the topic. Unemployment currently remains very low (3.4% as of January 2024).  The low unemployment is one reason the Fed is cautious.  Low unemployment puts pressure on the economy for higher wages which can be bad for inflation.


Yes, we hear the headlines about the layoffs in the tech-sector.  However, don’t forget the tech-sector was stockpiling or “banking employees” during Covid – hiring people they didn’t need at the moment to make sure they had all the people they may need at a future date.  Oops, they hired too many.  So now they are trimming the excess. 


The consumer is still spending money.  Consumer confidence remains high.  The manufacturing sector is gaining momentum again.  All reasons the Fed is cautious.


Conclusion:  Inflation is much lower than it was, but not low enough.  Both good and bad news.  Unemployment remains low and the consumer is still spending.  Good news for economic growth.  Bad news is that it makes the Fed go slow with future rate cuts.  It appears the economy is not going into a big recession or maybe even achieve the “soft landing.”


Oops again.  Fed-speak: “Soft landing” occurs when the Fed is able to raise interest rates enough to lower inflation to a level without causing a recession.  In the past, when the Fed raised interest rates from near zero to over 5% in a relative short time frame, the economy has had a seizure-like reaction where unemployment doubles, consumers stop spending, doors slam shut, the lights go off and we have one heck of a recession.


This time.  Maybe not.  Call us with comments or questions.

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