No Need for Powell to be Hawkish
August 24, 2022
Unlikely: Monday’s sell-off was attributed to fears that Powell will delivering a hawkish speech this Friday. But there doesn’t seem to be any reason why Powell needs to deliver a hawkish speech. The most recent data all points to softer growth and decelerating inflation. Economists are aware of the lagged effects of policy tightening and the Fed is also engaged in the balance sheet runoff process (opposite of QE), which is a highly effective way to tighten policy. The US dollar is also strong, which restricts financial conditions. Lastly, there are two important inflation reports due before the 9/21 Fed meeting with August payrolls due 9/2 and CPI 9/13. The Fed will want to see those reports before they make a September policy decision.
Crazy pills: Some of the recent inflation spike could have been avoided. The $1.9T fiscal stimulus bill that was pushed through Congress in the spring of ’21 was unhelpful to say the least. When the bill was signed in March ’21, a good portion of the US population had already become fully vaccinated, US manufacturing PMI was at 59.1 and non-manufacturing PMI was at 60.40. Those were both at/near all records at the time. PMI is the best forward-looking (3-6 months) data economists have. It’s measured as a dispersion index with levels above 50 indicating expansion and below 50 indicating contraction. The distance from 50 in either direction is a measure of velocity. Adding $1.9T in fiscal stimulus at that time was too many dollars in search of too-few goods.