SPECIAL REPORT: Reaction To Today's Federal Reserve Update | Axel Merk

My notes on today' news + a live discussion with Fed-watcher Axel Merk tomorrow

An hour ago, the Federal Reserve Open Market Committee released the outcome of its meeting this week.

And just a few minutes ago, Fed Chair Jerome Powell just wrapped up his press conference related to this release.

My bullet-point notes to Powell’s conference are below.

But I’m also happy to announce that Fed-watcher Axel Merk will be joining us again tomorrow to deliver his expert reaction to the Fed’s latest guidance as well as take questions live.

This live event with Axel will take place tomorrow Feb 1 at 5pmET/2pmPT. Only premium subscribers to this Substack will be able to participate. Details on how to access the event are provided at the bottom of this letter.

And if you’re not ready to become a premium subscriber, don’t fret. A replay of the discussion will be shared publicly on Tuesday.

OK, so without further ado, here are the key points I captured from Jerome Powell’s press conference:

Powell's prepared script:

• FOMC voted to leave policy rate unchanged & keep QT going.

• Economy has been expanding at a strong pace.

• Supply & demand coming into better balance

• Jobs growth is below a year ago, but still "strong". Supply of workers is improving, though there are still more openings than workers. Nominal wage growth is "easing". 

• Inflation trajectory is good, but it's still too high and the Fed needs more evidence to be confident it will continue heading towards its 2% goal before starting rate cuts and/or easing

• "The Fed is deeply sensitive to the pain high inflation is causing families" (yeah, sure....)

• Fed knows its higher rates & QT are cooling things down and wants to wait for this to play out a bit further. And while the Fed does plan to start easing "at some point later this year", it will keep rates higher for longer if needed.

• Employment + inflation goals are "moving into better balance"

• Won't be afraid to go tighter with policy if necessary. That said, it doesn't want to wait too long to act (though that's its clear track record...)

• Fed will make decisions "meeting by meeting" going forward

• Price stability is key. Main goal is getting that back under control.

Q&A:

• Fed wants "greater confidence" that inflation is headed to 2% = a continuation of the good data. Is the data it's watching accurate/sustainable? Goods inflation is encouraging, but will services follow suit?

• Doesn't see strong growth or strong labor as a problem, as long as inflation continues coming down.

• Is the Fed risking waiting too long to cut? (asked by Nick Timros) Almost every FOMC member is on board with cutting rates this year. Need more confirmation of progress before starting though -- not going to chained arbitrarily to things like the Taylor Rule.

• Would a slide in employment cause the Fed to start cutting? Yes, though we're not expecting that. But if employment starts weakening, yes we'll cut earlier. Similarly, if inflation proves stickers, we'll wait longer.

• Is the FMOC unanimous about what the "confidence" level will need to be to start cutting? Not really. We have a lot of debate, which is healthy for decision-making.

• Our data is of better integrity as we're no longer in the chaos of the pandemic. Supply chains still healing, may take a bit longer before the effects of healing are fully reflected in prices.

• We have not achieved a soft landing and "still have a ways to go" before being able to declare victory

• Powell thinks the Fed is well above the neutral rate. But economic growth remains strong due to the recovery ("healing" of supply chains and jobs market), which is balancing things out. Once healing slows down, today's rates will bite more. 

• The labor market is nearing "normal" from the disruptions of COVID and the stimulus packages. Labor supply & demand is increasingly normalizing. Wage pressure is gradually starting to diminish. That should help moderate inflation."We're moving in the right direction".

• Powell is less worried about inflation re-spiking higher, but sees a better chance it could stabilize at a point above the 2% target and become more troublesome to bring down than currently expected.

• "This is a good economy". Growth will moderate from here, but Powell is not worried about a hard landing/recession.

• Powell doesn't think that rate cuts will start in March. Rate cuts will be made on a meeting-by-meeting basis -- when the first cut is made, don't assume it will be the beginning of a cycle. We're going to react to the data at each meeting & then decide how to act.

• Powell is uncertain as to the direction of productivity growth. Not sure AI is going to make a material contribution anytime soon.

• Housing market is suffering from higher rates (Fed-induced) and lack of inventory (outside of Fed control). Market rents are flattening, which will bring CPI down (over time)

• QT: balance sheet runoff has "gone well". Starting to discuss how/when to reduce scope of the program.

• Fed looks at rates and the balance sheet as two distinct levels. Pivoting on one doesn't guarantee a pivot on the other.

• Fed hasn't picked target conditions for stopping QT. That will be the focus of the next meeting. Would likely not wait for RRP to go to $0.

• Powell refused to answer whether he wants a 3rd term heading the Fed.

• Fed has been perplexed why consumer confidence readings have been low while unemployment has been so low. Maybe due to the spike in cost of living? (ya think??) Powell is happy to see confidence starting to increase. Thinks that could lead to further consumer spending, which would support the current economic strength.

• Regional Fed banks are hearing in their districts that "things are picking up at the margin". 

For premium subscribers of this Substack, details for accessing tomorrow’s live event with Axel Merk are provided below.

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