We thought Federal Reserve Chairman Jerome Powell would be wary of declaring victory over inflation on Wednesday, but he was wary in formal declaration only. Everything else about his press conference after the latest Federal Open Market Committee (FOMC) meeting suggested that the Chairman’s Paul Volcker era is over. Easier money is on the way.
“The committee is proceeding carefully,” he said. The Fed still wants to see “ongoing progress” toward the Fed’s 2% inflation target, “we still have a ways to go,” and “no one is declaring victory” over inflation.
The financial markets didn’t believe a word of it. Stocks soared to new heights, with the Dow industrials breaking 37000 for the first time. Bond yields plunged, as the 10-year Treasury note fell to 4.025%. It was nearly 5% in late October.
Investors were no doubt looking at the Fed’s famous “dot plots,” which track the estimates of Fed governors and bank presidents about future inflation and interest rates. The monetary mavens think inflation is conquered, even if Mr. Powell won’t say it.
The Fed eminences are now forecasting three interest rate cuts in 2024 from the current policy target of 5.25%-5.5%. They see personal-consumption expenditures inflation, the Fed’s favorite measure, falling to 2.8% this year, a full half a point lower than they projected in September.
Markets may also have spotted the doves between the lines of Mr. Powell’s hawkish words as he extolled the anti-inflation progress made so far. In response to one question, he pointedly said the Fed is getting close to the point when unemployment and inflation have equal priority in monetary calculations.
Is this pivot warranted? Mr. Powell is right that he has made anti-inflation progress, but his performance Wednesday will go far to easing the tighter monetary conditions that have produced this progress. The FOMC didn’t change policy this week, and it can always postpone its rate-cutting for longer. But it would be a shame to declare victory too soon.
