Deciphering the FOMC’s Fed-Speak

A few months back, I wrote you a short primer on “Fed-speak” including some mind boggling rhetoric they employ to use the maximum words to say absolutely nothing. 

Technically the Fed’s job description is (according to Chairman Powell): 

“At the Federal Reserve, we are strongly committed to achieving the monetary policy goals that Congress has given us: maximum employment and price stability.” 

A silent part of the job description is to make sure their messaging keeps the market calm. (That means you need to listen for what’s NOT being said as much as what is.)

Facing an almost impossible task, at least in my opinion, Chairman Powell set out to do exactly that in last week’s FOMC announcement. So let’s decipher some of what the chairman said. (All emphases are mine).

Always Start with the Good News

Powell opened with the good news:

Economic activity expanded at a robust 5-1/2 percent pace last year, reflecting progress on vaccinations and the reopening of the economy, fiscal and monetary policy support, and the healthy financial positions of households and businesses.

Then worked his way to the elephant in the room:

Inflation remains well above our longer-run goal of 2 percent. Aggregate demand is strong, and bottlenecks and supply constraints are limiting how quickly production can respond. These supply disruptions have been larger and longer lasting than anticipated, exacerbated by waves of the virus here and abroad, and price pressures have spread to a broader range of goods and services. Additionally, higher energy prices are driving up overall inflation.

Never mind that according to CPI data, inflation is nearly 6% above your 2% goal. Just understand there are extenuating circumstances — so it’s not all their fault. All the same, the committee wants you to know they have it under control…

As we emphasize in our policy statement, with appropriate firming in the stance of monetary policy, we expect inflation to return to 2 percent while the labor market remains strong.

But hedge a little just in case:

That said, inflation is likely to take longer to return to our price stability goal than previously expected.

Throughout the entire announcement (and ensuing Q&A), make sure the audience knows you have all the “tools” you need…

we will use our tools to support financial and macroeconomic stability.

… committee that’s acutely aware of the need to return the economy to price stability and determined to use our tools to do exactly that.

…we’re going to deploy our tools to achieve our goals

We have the tools that we need, and we’re going to use them.

…this is a committee that is determined to use its tools to make sure that higher inflation does not become entrenched.

He was so bent on driving this point home that, during his speech and Q&A, he said some version of “the tools” 18 times. 

The Unfortunate Truth

This announcement was another amazing example of Fed-speak — a lot of words saying very little. 

The truth is, as we’ve said before, this bout of inflation is not strictly a monetary phenomenon. The chairman essentially acknowledged that when he talked about “bottlenecks and supply constraints.”

What he didn’t acknowledge is that their “tools” will be pretty much totally ineffective against those kinds of factors. 

And should they raise rates too fast in the fight against inflation, they’ll not only spook the market, but likely push the economy into a recession.

Of course, unlike “tools,” Powell only used the word “recession” once…

Make the trend your friend,

Bob Byrne
Editor, Streetlight Daily