Breitbart Business Digest: The Journey Matters Less Than the Destination for Powell's Fed

The poet and essayist Ralph Waldo Emerson is often credited with advising that “life is a journey not a destination.” Federal Reserve Chairman Jerome Powell on Wednesday told us that for the Federal Reserve, it is the destination that matters more than the journey.

The Fed announced on Wednesday that it was raising its benchmark federal funds target 75 basis points. This is the fourth straight hike of this size, making this by far the biggest streak of rate increases since the Fed began explicitly targeting the overnight interbank borrowing rate. It brings the target up to a range of 3.75 percent and four percent, around where the effective fed funds rate was back in January of 2008. Back then, however, the Fed was cutting rates. The last time the Fed hit this level on the way up was back in the fall of 2005. In that cycle, the target topped out at 5.25 percent in the summer of 2006 and stayed there for nearly a year.

In the statement announcing the hike, the Fed included some new language that initially sowed some confusion in markets. “In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” the Fed said.

This appeared to mirror some of the language of the Fed’s critics, who have argued that because interest rate increases famously effect the economy with long lags, the Fed risks over-tightening if it waits to see inflation come down before pausing its rate hikes. Equity markets saw this as a softening of the Fed’s stance, pushing stock prices up in the immediate market reaction to the announcement.

At his press conference, Powell said it is “very premature” to begin discussing a pause in rate hikes. Going even further, the Fed chair indicated that the so-called terminal rate—the highest rate target the Fed will hit this target—is likely higher than the summary of economic projections released at the September meeting indicated. In other words, rates are likely to go higher than Fed officials previously thought.

Powell said there were three questions about Fed policy that people have been asking. The first question concerns the pace: How fast will the Fed raise rates? Powell said that the Fed has moved quickly but that ongoing focus on the pace of hikes was no longer appropriate. This appears to create room for the Fed to slow hikes in the future. “That time is coming, and it may come as soon as the next meeting or the one after that,” Powell said.

The second question is how high rates will be raised—which Powell indicated was more important than the size of the next hikes. “We may ultimately move to higher levels than we thought at the September meeting,” Powell said. The market had been assuming a terminal rate between 4.5 percent and five percent, matching what was indicated in the forecasts of Fed officials. Powell’s words seem to indicate that the forecast will be rising closer to five percent. In other words, it is the destination that matters and not the journey.

The third question to consider is how long the Fed will keep its target at the terminal rate. Powell was unequivocal on this. The Fed will keep it there until the rate of inflation is credibly moving back to the target.

The market realized that the Fed’s message was nowhere near as dovish as it initially thought, and stocks sold off during the conference. For those keeping track, this is the second straight meeting in which Powell’s press conference brought down stocks.

The Emerson line about life’s “journey” is apocryphal, by the way. If he ever uttered those words, he never committed them to writing, and none of his contemporaries quoted him as saying it.