Parsing Powell: What the Chairman Said, and Didn’t Say, on 60 Minutes (February 5, 2024)

The Fed Chairman may have dropped some unintended and overlooked policy hints

By Lisa Beilfuss

This week’s article was going to focus on the January jobs report. Until Fed Chairman Jerome Powell’s 60 Minutes interview aired Sunday night.  

While this writer isn’t sure what the 60 Minutes segment was intended to accomplish, it may give investors reason to doubt that the central bank manages monetary policy and the economy quite as the consensus assumes. This week we have prepared a synopsis of noteworthy excerpts from the interview, followed by our own commentary, that may help investors read between the lines of official Fed speak and economic forecasts. 

The excerpts, in bold, are from the CBS transcript of Powell’s interview with Scott Pelley.

“I can't overstate how important it is to restore price stability, by which I mean inflation is low and predictable and people don't have to think about it in their daily lives. In their daily economic lives, inflation is just not something that you talk about. That's where we were for 20 years. We want to get back to that, and I think we are on a path to that.”

In the 20 years leading up to the Covid-19 pandemic, the total consumer price index averaged a 2.17% year-over-year increase. If inflation was already averaging at the Fed’s 2% goal for two decades, then why did Powell announce in August 2020 a new average inflation-targeting framework that allowed for inflation to run hot, ostensibly to offset periods of sub-2% inflation? In this context, his comments suggest the true inflation target is simply the highest rate possible before agitating the public.  

“The broader situation is that the economy is strong, the labor market is strong, and inflation is coming down. And my colleagues and I are trying to pick the right point at which to begin to dial back our restrictive policy stance. That time is coming. We've said that we want to be more confident that inflation is moving down to 2%. And I would say that I think it's not likely that this committee will reach that level of confidence in time for the March meeting, which is in seven weeks.”

Nonfarm payrolls have been strong. But it probably shouldn’t be the go-to job-market indicator: The response rate is low and falling, it is no longer a coincident indicator but a lagging one, and it double counts multiple job holders. Alternative measures are sending a weaker message. 

Consider a finding from economist Courtney Shupert at MacroPolicy Perspectives. She has been analyzing fourth-quarter earnings calls for hiring/firing actions, and says layoffs are exceeding hiring for the first time since 2020. 

Now go back to the Fed’s new inflation framework. Since the goal is to average 2% over some unspecified period of time, it means that the central bank’s dual mandate (full employment and price stability) is asymmetrical. The point is that the Fed will probably respond quickly to labor market weakness even if inflation is above target. Such weakness could be evident to the Fed by March, even if a “level of confidence” about 2% inflation isn’t.

“We do not consider politics in our decisions. We never do. And we never will. And I think the record -- fortunately, the historical record really backs that up….If we tried to incorporate a whole 'nother set of factors in politics into those decisions, it could only lead to worse economic outcomes.”

Powell’s response to a question about politics potentially affecting changes in monetary policy is a textbook answer. But it may be incomplete. Recall President Joe Biden took more time than expected to renominate Powell as Fed chair. That announcement came on November 22, 2021. Eight days later, and after nearly a year of arguing that price inflation was transitory, Powell said it was time to abandon the word “transitory” in describing inflation. 

“Headline inflation, which is total inflation including, you know, energy and food prices, that's our target. But we look at core inflation, which excludes energy and food prices because that tends to be a better indication of where things are going.

It is unclear if Powell’s reference to headline inflation as the Fed’s target was an error or a Freudian slip. But it is worth considering it alongside the latest personal consumption expenditure index. The core PCE, which is the Fed’s stated target and the metric used in its quarterly Summary of Economic Projections, most recently rose 2.9% from a year earlier. The total PCE last rose 2.6%. 

Policymakers say they are data dependent. But the reality is that they emphasize the data that fit the decisions they want to make. Total PCE is currently a friendlier series for a Fed wishing to ease sooner than later. 

“I don't think [a real-estate led banking crisis is] likely. We have work-from-home, and you have weakness in office real estate, and also downtown retail. There will be losses in that. We looked at the larger banks' balance sheets, and it appears to be a manageable problem. There's some smaller and regional banks that have concentrated exposures in these areas that are challenged…We're working with them to make sure that they have the resources and a plan to work their way through the expected losses.” 

Powell’s comments around the commercial real estate problem come as the Fed’s emergency Bank Term Funding Program (BTFP) is set to expire in March. The Fed is meanwhile prodding all banks to tap its discount window at least once a year to try to remove the stigma of borrowing from the facility. But unlike the BTFP, where collateral has been valued at par, banks using the discount window must provide collateral valued at market prices subject to a haircut based on the quality of the collateral pledged. 

The Fed Chair may be relatively unfazed because he expects to cut rates soon. But that is probably naive. 

Consider what one distressed real-estate investor recently told Bloomberg: “The percentage of loans that banks have so far been reported as delinquent are a drop in the bucket compared to the defaults that will occur throughout 2024 and 2025,” said David Aviram of Maverick Real Estate Partners. “Banks remain exposed to these significant risks, and the potential decline in interest rates in the next year won’t solve bank problems.”

“We're making changes steadily in supervision to make it more effective. And we're actually working on proposals now on the regulatory side. You know, we want to get this right. We want to learn the right lessons and get it right. And so, we're working on those proposals on the regulatory side. And I think we'll be coming out with things this year for consideration. When we do a rule, we send it out for comment. And then we read those comments, and we try to try to come to a good place.”

Powell’s comments about Fed changes after the March failure of Silicon Valley Bank, the second largest U.S. bank failure, don’t convey urgency. That is despite renewed regional bank concerns that have taken the SPDR S&P Regional Banking ETF (ticker: KRE) down 10% this month.  

It is unclear whether Powell is unduly optimistic, steeped in bureaucracy, or simply sees some bank failures as a necessary part of the cycle. Regardless, his comments lend credence to some analysts’ view that a wave of bank failures is inevitable and will spur interest-rate cuts, an abrupt end to balance-sheet runoff (QT), and a potentially quick return to quantitative easing (QE).  

Consider a September 2023 paper by University of Southern California professor Erica Jiang and others. It found that 10% of U.S. banks have larger unrecognized losses and lower capital than SVB, which prompted the creation of the BTFP program last March. What is more, the researchers found that even if only half of uninsured depositors decided to withdraw, roughly 190 banks with total assets of $300 billion are at a potential risk of insolvency–meaning that the mark-to-market value of their remaining assets would be insufficient to repay all insured deposits. 

Now consider that the Federal Deposit Insurance Corporation’s (FDIC) Deposit Insurance Fund (DIF) balance was $117.0 billion as of June 30, 2023, an amount that would strain the FDIC (and the government) should several regional banks fail.