Markets rallied today after the Fed decision after Jay Powells press conference apparently they liked the fact that he said at
some point will be appropriate to pause. Mr. Powell said watch the dot plot from June. What's the message here.
Well the message is that they will be continuing rate increases although I think starting in September meeting as he said it
will be meeting by meeting which means I think the catch up phase and the phase of of getting to neutral is over and we're
in a new phase. And he emphasized that at some point the committee will slow down. And that's a reasonable picture of how
the next few meetings in the next few months will play out. You know how powerful to the fund's rate is neutral. But the P C
E deflator inflation rates at six point three. CPI is at nine point one. That is so far above the funds rate. We still have a
very negative funds rate. How could that possibly be neutral Dennis. Well first of all it's an estimate. And the estimates
are not aren't you know clearly haven't have big ranges of potential variance around them.
I don't think we should confuse what you would call restrictive territory or or or real positive real rates with the notion of
neutral. Neutral really is where they think you know in normal circumstances the growth of the economy and the downside risk
are sort of in balance. And it's neither stimulative nor is it controllable contractionary. That's what neutral supposed to
mean. And it's a notional number two to two and a half percent. So is I guess we should figure that that if we're at neutral now
what Jay Powell is telling us look at the dots which show rates hikes continuing into next year that they're telling us we need
to raise the funds rate well above neutral to get to the point where it's no longer stimulative and it can finally start at
least start to bring inflation down. Is that the conclusion. Yes I think that's exactly the conclusion. Neutral won't do it. They
have to raise the funds rate a bit more close to 4 percent is the current projection. And that may or may not be adequate to
achieve a decline in the inflation rate. Dennis when Chair Powell today said that he didn't think that we
are in a recession here in the US. What was he thinking of as a definition and characteristic of a
recession for him to think that we're just not there yet. And do you agree. Well first he's thinking of something that's very
broad based and of fairly long duration at least a couple of quarters. And he's also thinking of an employment market that
gets hammered pretty badly by the performance of the economy. And I thought in his comments in the press conference he really
put a lot of emphasis on a positive employment market. And that's the principal reason I think he can deny that we're in a
recession at the moment. That is how tricky is this effort given that we have a lot of
unusual elements creating that price pressure be it what's going on geopolitically when it comes to what we see across
commodities as supply chains post pandemic but also how much would he be concerned with what really this. I'd be concerned
about entrenching the inflation psychology at the moment. How deeply entrenched do you see that.
Well he emphasized in the press conference that the committee does not believe that inflation expectations have become
unanchored. That's the term that's often used. But they are very much focused on inflation. Expectations are
going to watch all indicators very closely. They he cited in the press conference the break even the break even rate that you get
in the Treasury Inflation Protected Securities. So they're very much focused on that
going forward. I think they'll depending on how stubborn this inflation is they'll continue to
monitor expectations. And I think it will be an important factor in their decision making. What about the risk of recession.
We're not in a recession now. Jay Powell in the past has acknowledged yes those risks are rising. Do you see the risk
rising. It is the main risk here that the Fed has to keep hiking rates. That's the number one job until it sees the economy
coming down. And that's going to take a slowdown in the economy. They have to do it recession or not.
The longer we get unacceptable inflation numbers the. Greater the risk becomes. It seems to me because they're going to have
to continue to attack and the risk of an overshoot I think increases. Remember they're looking in the rearview mirror at
the numbers that are relevant to two prices last month and the month before that. And it's not an exact science. How they set
the policy rate. So if inflation turns out to be very stubborn which
it could be. It seems to me that the risk of recession and the risk of a mistake rise.
Paul said he has the will. They need to keep hiking rates until he sees he's only sure that inflation is heading back to 2
percent. Rather Mr. President Cleveland Fed speaking on this show recently defined that as
not peaking but going down month after month. Not just a core headline to you. You're at the Fed. You sat there. What do you
think they need to see now. Well as Loretta Masters said they need to see a series of
positive numbers and that means more than one month. Now I think the next two or three cycles and I say cycle because you have
both the CPI and the P.C. index indexes and you have the both the headline and and the core. But the next two or three
cycles will be very telling. And if you get let's say into the October meeting and it's been a series of good readings of
inflation progress then maybe a slowdown in the pace of rate increases will happen. But they need more than one month. One
month is simply not enough to go on. If you remember in the press conference he put particular
emphasis on the word compelling evidence. And I thought that was a a telling comment on his part.
That is is this a death of forward guidance. Because we've also seen other major central banks like here in Australia the
audience that really come under a lot of criticism for the way that the guidance turned out to be wrong throughout the
pandemic. So at this point one central bank has been feeling that guidance if they get it wrong is actually much more of a
hindrance that help. Well the guidance on the course of the economy. I thought could
Paul hedged that adequately because he just said there's so much uncertainty.
Again at one point he said nobody knows where the economy will be six or nine months from
now. The guidance on policy again he I think he took a break with the last couple of meetings where they were fairly concrete
about what to expect in the next meeting. Now we have eight weeks until the September meeting. And he did not he was not
committal any in so many words said you know it's likely 50 or 75 but we don't know. We'll have to see what the data tell us.