The Fed is set to retire its tightening bias at its policy meeting this week.

Officials have a first-class problem—inflation fell faster than they expected—but it poses a conundrum nevertheless: How soon and fast do you dial back restrictive policy?

wsj.com/economy/centra… There's a case for delaying cuts until mid-year or beyond that goes like this: If this is really such a restrictive policy, why is the economy doing so well?

Yes, real rates have been rising, but real incomes are also picking up as inflation comes down.

Fed governor Chris Waller: Rate cuts are coming into view but the process should be “carefully calibrated and not rushed.”

As long as growth is fine, “I see no reason to move as quickly or cut as rapidly” as the Fed has in past cutting cycles.

This is a clear pivot from Waller: “From now on, the setting of policy needs to proceed with more caution to avoid over-tightening”

But but but … the Fed’s goal is sustainable 2% inflation. “That goal cannot be achieved for just a moment in time.”

Powell's speech at the IMF was interrupted by protesters who want the Fed to use its bank-supervision authorities to take steps that would try to raise the cost of banks to finance fossil fuel activities

During the Q&A, Powell explained his thinking on resisting such pressures In short, the Fed's autonomy (often called "independence") to manage demand (by setting rates) isn't set in stone.

It's an institutional arrangement: Powers that've been delegated by Congress could be summarily revoked.

Powell: Inflation isn't coming down as swiftly as anticipated, but it will take time for service-sector inflation to move lower.

"The bottom line is that policy hasn’t been restrictive enough for long enough to see those effects." Powell: There's been no decision to move to an every-other-meeting rate hike pattern.

"It may work out that way; it may not work out that way."

"I wouldn't take moving at consecutive meetings off the table at all."

Former Dallas Fed chief Rob Kaplan thinks we're in the early stage of banking woes.

He gave a recent interview that is striking (and I relied quite a bit in this column) because it hits different notes compared to recent Fed speak teeing up a May hike. wsj.com/articles/why-t… Kaplan says he wouldn't have hiked in March—and wouldn't do so in May, either.

To him, taking fed-funds from 4.75% to 5.25% doesn't do as much for inflation as the potential harm from overshooting because he thinks the inflation fight will be measured in years, not months.

U.S. bank deposits declined $126 billion for the week ending March 22 from the previous week.

Small banks saw net *inflows* of $6 billion, while large banks saw $90 billion in *outflows*

But do note there have been big revisions to the previous week federalreserve.gov/releases/h8/cu… For the week ending March 15, small banks saw deposit outflows of $196 billion, up from the initially reported -$120 billion

Total deposits for the March 8-15 period are now reported to have declined $175 billion, up from the initially reported -$98 billion

FDIC Chair Martin Gruenberg explains the decision to make the systemic risk determination to backstop all deposits at SVB and Signature Bank fdic.gov/news/speeches/… Gruenberg: The ten largest deposit accounts at SVB held $13.3 billion in the aggregate.

The Fed faces one of its toughest calls in years: whether to raise rates again to fight stubbornly high inflation or take a timeout amid the most intense banking crisis since 2008.

“It’s going to be a tough decision with very tricky communications." wsj.com/articles/feder… A few considerations: Has the outlook changed materially?

Central banks have framed a general principle of using separate tools for separate jobs.

NY Fed President John Williams said last fall: “Monetary policy should not try to be a jack of all trades and a master of none.”

How should the government treat uninsured depositors after a bank run?

It's a question Jay Powell faced as an assistant Treasury secretary in January 1991, and it's recounted in my book (which is worth reading if you're interested in how Powell operates) nicktimiraos.com/book Fed governor John LaWare argued for saving depositors, opposing Powell’s boss.

“You're the government, and you can do whatever you want, but here's what we think will happen if we haircut uninsured depositors. There will be a run on every American bank when they open Monday.”

Senate Banking Committee Chair Sherrod Brown (D., Ohio) began the Fed hearing warning against overusing monetary policy to address high inflation, but he is using his five-minute Q&A with Powell to address other issues, such as regulatory policy and crypto assets. The second Democratic lawmaker to question Powell, Sen. Bob Menendez, focuses initially on the debt limit and the Biden administration's focus on diversity in central bank nominees. Monetary policy comes up briefly at the end.

FOMC Minutes: "Almost all" thought 25 bps was appropriate but a "few" favored or would have also agreed to a larger 50 bps increase. FOMC Minutes: "Almost all participants observed that slowing the pace of rate increases at the current juncture would allow for appropriate risk management."

St. Louis Fed President Jim Bullard to reporters this afternoon:

• He would have preferred raising rates by 50 bps this month and to get to a funds rate of 5¼-5½% as quickly as possible.

"I don't see much merit in delaying our approach to that level." wsj.com/articles/feds-… • Bullard said he sees core PCE inflation coming down to 3.7% this year.

"My overall judgment is it will be a long battle against inflation."

Behind the bond market's disconnect from the Fed on the interest-rate outlook:

The Fed thinks inflation won't come down as quickly as do investors, who are factoring in a greater probability of a sharp downturn that brings inflation down

w/@akaneotani
wsj.com/articles/stock… The Fed “can learn from what the market is thinking and saying,” said William English, who was once the top adviser on monetary policy at the central bank.

“That’s information for policy makers. It isn’t something to be particularly feared.”

Fed deliberations over how much more to raise rates will hinge on how much they expect the economy to slow.

I.E. how long are the policy lags?

“We're in a different world... The last several cycles haven’t had pandemics and land wars in Europe in them.” wsj.com/articles/how-q… There's broad agreement the Fed's willingness to tell markets what they're doing or planning to do has shortened the transmission of policy. They influence financial conditions much faster.

But there's disagreement over how long it takes for that to influence the real economy.

Fed governor Chris Waller throws his support behind a 25 basis point rate rise next month, further cementing expectations for the February FOMC meeting

Waller’s speech is entitled “A Case for Cautious Optimism” federalreserve.gov/newsevents/spe… Waller: “We have made progress.”

“The FOMC’s goal in raising interest rates is to dampen demand and economic activity to support further reductions in inflation. And there is ample evidence that this is exactly what is going on in the business sector.” wsj.com/articles/fed-o…

Fed Vice Chair Lael Brainard: There are reasons to think high inflation in the more labor sensitive “core services ex-housing” basket might reflect the pass-through of pandemic and war one-offs and not solely cyclical strength from tight labor markets wsj.com/articles/top-f… Brainard: "To the extent that inputs other than wages may have been responsible in part for important price increases for some nonhousing service sectors, an unwinding of these factors could help bring down nonhousing services inflation."

For inflation to stay high, consumers have to accept price increases by continuing to purchase products in which prices have been rising.

But as this story from @SuzanneKapner @SarahNassauer shows, there are growing signs of pushback in retail. wsj.com/articles/shopp… A California T-shirt maker has returned prices to prepandemic levels after raising prices $4 in 2020:

“The consumer’s mind-set has changed.”

“They want to save money and raising prices is not an option for me in 2023, even though many of my costs are still elevated.”

The Fed has posted the transcripts of all FOMC meetings from 2017, pulling back the curtain on the deliberations and rollout of its plan to passively shrink its then-$4.5 trillion asset portfolio federalreserve.gov/monetarypolicy… The December 2017 policy meeting shows officials trying to reconcile the potential effects of the Trump tax cuts (which hadn't been finalized then).

Chair Yellen: "I now anticipate that a modestly faster pace of policy tightening will be appropriate."

federalreserve.gov/monetarypolicy…

One question I hear often is why the ECB and other central banks are much farther ahead of the Fed on climate issues

Powell implicitly answered that question in his appearance in Stockholm (which didn't address current rate policy or the economic outlook) wsj.com/articles/jerom… In his opening remarks, Powell declared the Fed "will not be a climate policymaker"

And in his concluding remarks, he said, "We shouldn't be getting ahead of where the public is if there's no specific mandate," saying this especially true in the U.S.

https://twitter.com/NickTimiraos/status/1612812308966694912

In a briefing with reporters, St. Louis Fed President Jim Bullard didn't say directly whether he would favor a 25 or 50 basis point increase at the next Fed meeting

He indicated upcoming data releases would shape the decision wsj.com/articles/fed-o… Bullard: "The policy rate is still a little bit below the sufficiently restrictive zone. I think it would behoove the committee to get into that zone as soon as we can without ignoring the data. You always have to pay attention to what the data is telling you."

This also underscores one challenge of the SEP as a signaling device. It offers a set of forecasts around a single modal outlook (or outlooks, plural, since every participant is putting down appropriate policy under his or her own modal outlook).

https://twitter.com/davidbeckworth/status/1611040781565038592

In other words, *if* the economy performs a certain way (all but two participants do not have negative Q4-Q4 GDP growth in the forecast; most have PCE inflation declining to somewhere in the mid to low 3s with only mild increases in unemployment), *then* no cuts until 2024.