Jay Powell thinks charges don’t have far to fall | USAEMALL.com

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Good morning. A few days ago, Unhedged wrote this about Big Tech earnings reports: “The market is being more pragmatic about the [artificial intelligence] gamble than it is getting credit for. Hype will not be enough. Investors want to see performance this week.” Please indulge us as we take a tiny victory lap. Meta’s third-quarter report included a warning of accelerating spending next year, and the market sent its shares down 8 per cent; Alphabet called for higher investments too, but combined this with much better than expected earnings, and its shares rose smartly. We’ll have more to say on tech earnings after Amazon and Apple report tomorrow. Meanwhile, email us: unhedged@ft.com.

The Fed

It all happened as expected: the Federal Reserve, yesterday, delivered a 25-basis point interest rate cut and said balance sheet reduction would come to an end this year. But what sent a mild, if noticeable, tremor through the markets was chair Jay Powell’s decision to emphasise, right from the start of his press conference, that an additional cut in December — which the market has been counting on — was “far from” assured, given “strongly differing” views on the committee. The point was emphasised by a pair of dissents to the committee’s decision — one calling for no cut, the other for a jumbo cut. Bond yields rose, and what had been an upbeat day for stocks stalled.

Some of the uncertainty about December can be put down to the fact that the Fed, during the government shutdown, is operating without the full range of data it usually depends upon. “When you are driving in the fog, you slow down,” Powell said. Fair enough, but no one should fool themselves into thinking that, were the shutdown to end, the way would automatically be clear for a cut. It won’t be.

Powell once again noted the Fed’s two mandates, price stability and employment, are pointed in two different directions. But he did not characterise this tension as desperate or tragic. On the contrary: on both inflation and jobs, Powell said the economy is close to where the central bank wants it to be. On jobs, he emphasised the gentleness with which the job market appears to be cooling:

The fact that we’re not seeing an uptick in claims or an uptick in openings suggests that you are seeing maybe continued very gradual cooling [of the labour market], but nothing more than that, so that does give you some comfort. 

And he argued the slowdown in jobs is mostly a matter of worker supply, not weak demand:

There are two things affecting the job market, and one of them is just a dramatic reduction in the supply of new workers . . . [there is] declining labour force participation, which is a cyclical thing, and there is lower immigration which is just a big policy change . . . a big part of the whole story is that supply side. In addition . . . the demand for labour has gone down a little more than supply . . . but it is mostly a supply function, I think

On the inflation side, Powell said based on the assumption that tariffs will turn out to be a one-time change in the price level, inflation is really quite close to 2 per cent:

You’ve seen goods prices increasing and that is really due to tariffs . . . housing services inflation has been coming down and is expected to continue to come down . . . that leaves the biggest category, which is services other than housing services, and that’s been kind of moving sideways during the past few months but a significant part of that is non-market services, and we don’t take a lot of signal about the tightness of the economy from that. You add all that up [and] inflation away from tariffs is not too far away from our 2 per cent goal . . . core PCE not including tariffs might be 2.3 or 2.4.

The world described in those comments is one in which, while monetary policy might be a touch restrictive, it is quite close to the neutral (Is it crazy to think that the neutral rate might be 1-2 per cent in real terms? The real fed funds rate is now in that range). It is not a world in which one should bet all-in on a December rate cut, or for that matter on multiple cuts next year. 

Is Powell’s description of the economy correct, though? Unhedged thinks his description of services inflation is a bit too sanguine, and the bigger risks are on the side of loosening too much. Services inflation excluding energy and housing is running at 3.2 per cent year-over year and not trending down. Here is a chart of it from our favourite inflation analyst, the indispensable Omair Sharif of Inflation Insights:

The reason we are jumpy on the inflation side is that with financial conditions very loose and financial asset prices very high indeed, a re-acceleration of inflation that pushed rates up could lead to a market correction, one large enough to cause a recession. Yesterday, Powell was asked about the risks from high asset prices, the AI investment boom, and the appearance of credit cockroaches. His answers were that the banking and financial systems look well capitalised and stable, AI investment is not sensitive to monetary policy, and the credit cockroaches don’t look systemic. That’s probably right, but the possibility that it is not needs to be taken very seriously indeed.

One good read

Mama Mamdani

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