It looks like Federal Reserve Chairman Jerome Powell has formulated a strategy like this:
- Cave to market pressure after a high CPI print and hike 75 basis points
- Leak it to Timiraos and Liesman
- Ratchet up (big time) the dot plot
- Deliver another apologetic but determined press conference
It won't work.
The Fed's main conventional tools are interest rates and forward guidance but it has one that's at least as powerful: Let's call it mystique.
The Fed -- and particularly the Greenspan Fed -- cultivated an aura of knowing more than the market. An ability to steer markets by refocusing the set of facts: Caution when warranted and optimism when needed.
In the intervening years, that baton has been fumbled but it's still in play.
In his heart of hearts -- and there's reason for it -- Powell believes that inflation will largely come down on its own. Demand is fading, supply chains are easing and there's a shift to services spending.
The truly courageous thing for Powell to do today would be to make that case. Whether that's coupled with a 50 or 75 basis point hike isn't a big difference. What matters is the terminal top and the market is seeing 4.25% (a hard landing) instead of 3% (a soft landing).
Powell has an opportunity to push back. He can emphasize that they'll get to neutral quickly but that once supply chains ease and the cheap money dries up, it will be enough to cool inflation. Sure, there will be some of the usual caveats but he has an opportunity to deliver the main message powerfully rather than caving to political pressure.
The thing is, in order to do it he has to go all-in. He can't deliver it with his recent 'aww shucks' style. As I wrote after the last FOMC, he needs to say something like this:
"The rate of inflation will be falling imminently, we have no doubt," he could say. Then go on to craft a narrative of why prices will stop rising. "Don't worry" needs to be the message, we know what's coming.
Done right and it will buy the Fed six months to pause after getting to neutral.
Powell is the only person in the world who can change the narrative around out-of-control inflation and rising inflation expectations. He alone can change the conversation but today is probably his last chance to do it.
Maybe that won't be enough. If that's the case, then the Fed's credibility is shot already. The next step will be for him to step down and to install someone -- surely a Fed outsider -- who has credibility on inflation.
What I fear will happen instead is that we'll get the same apologetic delivery along with pledging faster hikes. That will box Powell into continuing with hikes until inflation actually cracks. At that point it will be way too late to save the economy and we'll have an unnecessarily tough recession.
Even worse would be a response that sounds panicky and reactionary. 75 basis points will be an early tell but the real test will be the press conference.
