FEDERAL RESERVE Powell warns of ‘some pain’ ahead as the Fed fights to bring down inflation

Federal Reserve Chairman Jerome Powell delivered a stern commitment Friday to halting inflation, warning that he expects the central bank to continue raising interest rates in a way that will cause “some pain” to the U.S. economy.

In his much-anticipated annual policy speech at Jackson Hole, Wyoming, Powell affirmed that the Fed will “use our tools forcefully” to attack inflation that is still running near its highest level in more than 40 years.

Even with a series of four consecutive interest rate increases totaling 2.25 percentage points, Powell said this is “no place to stop or pause” even though benchmark rates are probably around an area considered neither stimulative nor restrictive to growth.

More mysterious statements from the Fed in this article:

https://www.cnbc.com/2022/08/30/feds-williams-pushes-back-on-market-expectations-of-a-rate-cut-next-year.html

“I do think with demand far exceeding supply, we do need to get real interest rates … above zero,” Williams said. “We need to have somewhat restrictive policy to slow demand, and we’re not there yet.”
He added that he thinks the Fed is “still quite a ways from that.”

I'm not sure what he means by saying "demand far exceeding supply". Demand and supply for what? Prices are fairly stable where I shop. There's some inflation of food prices, but I wouldn't say demand far exceeds supply. Is he talking about the labor market? If so, I hope the Fed's economists understand that businesses do not actually intend or expect to fill all the job openings listed on the internet. They only intend and expect to fill about 20% of the jobs listed on the internet. Most of the job openings listed on the internet are just very selective fishing expeditions, looking for a few highly qualified applicants. If they can find a few highly qualified applicants, then they might fill 30% of the jobs listed in a given month. But most of the jobs listed are not actually jobs that have to be filled in the next few months. Back when job openings were listed in newspapers, it was expensive printing up and distributing newspapers and the ads were expensive. So companies only listed jobs they really needed to fill. Now it costs almost nothing to post a job opening on the internet. The internet is just electrons zipping around the world at very low costs that are paid mainly by end users. Anyway, I hope they understand that job listing do not mean what they meant 30 years ago, and the labor market is not nearly as tight as it might appear from all the jobs listed on the internet.

I'm not sure why he said the Fed is still quite a ways from a restrictive policy. We've just had two negative quarters of GDP growth, so I would say another increase of 50 basis points in interest rates would certainly get us to a restrictive policy. These Fed people need to be careful about trying to make objective judgments about highly subjective data on consumer inflation. Consumer prices are very difficult to measure, because the basket of products and services that consumers purchase each year is constantly changing, and the quality and capabilities of those products and services are also constantly changing. The BLS makes a lot of highly subjective quality adjustments and changes to the weightings placed on the items measured, in their calculations of the CPI. So the CPI is just an approximate estimate of consumer inflation. Nobody really knows the exact current rate of consumer inflation (which is different for each consumer) or the exact real interest rate at the present time. So I wouldn't be trying to fine-tune interest rates that much based on approximate estimates of consumer inflation. It's better to watch the GDP data to get a good sense for whether monetary policy is restrictive.

I hope this is mostly hawkish talk intended to convince corporate managers that their labor and material costs will be under control soon, and so they don't need to increase their selling prices again. If the Fed governors really think the Fed is quite a ways from restrictive interest rates, then we're in big trouble and we're going to have a recession for sure starting late this year or early next year.

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