Jay Powell’s Plan To Kill The “Fed Put” | Danielle DiMartino Booth

Episode Summary

Executive Summary: The conversation centers on the Fed's June meeting, where Powell paused rates but signaled July could remain “live” via hawkish dot plots and ongoing quantitative tightening. Danielle DiMartino Booth argues the hiking cycle is likely over, but the Fed is using higher-for-longer policy and QT as synthetic tightening amid weakening labor, CRE stress, and fading inflation.

Main Topics: Fed pause vs. possible July hike (Priority: 5/5): Powell did not raise rates in June, but framed July as a live meeting, leaving markets unsure whether the Fed is merely pausing or preparing to hike again. Dot plot and higher-for-longer signaling (Priority: 5/5): The June dot plot moved materially higher, with most FOMC members projecting tighter policy than in March, which Booth interprets as a signal to keep financial conditions restrictive. Quantitative tightening as synthetic rate hikes (Priority: 5/5): Booth argues QT is the real tightening mechanism now, allowing Powell to maintain pressure on the economy without necessarily raising the policy rate further. Labor market slowdown masked by white-collar job losses (Priority: 4/5): She says layoffs are increasingly concentrated in higher-paid sectors, delaying the unemployment rate’s rise while lower-paid workers are now beginning to be hit. Commercial real estate and bank credit pullbacks (Priority: 4/5): Offices and related lending are described as structurally impaired, with banks retreating from lending lines and lenders tightening even before formal rate cuts arrive. Inflation cooling through housing and used cars (Priority: 4/5): She highlights lagged disinflation in shelter and used vehicles, arguing CPI should continue easing as those components feed through over coming months. Fed credibility and post-2020 policy lessons (Priority: 3/5): Booth argues Powell wants to preserve Fed credibility after 2018-2020 volatility and avoid repeating emergency cuts/QE, while also correcting the Fed put mentality.

Key Arguments: Powell likely sees QT as the main tightening tool now, so keeping rates high for longer matters more than delivering additional hikes. The June dot plot signals the committee’s commitment to restrictive policy, not necessarily a new hiking cycle. Booth believes the rate-hiking cycle has ended; the Fed is using signaling and balance-sheet runoff to keep pressure on the economy. Labor weakness is worse than the unemployment rate suggests because layoffs are disproportionately white-collar and therefore slower to show up in claims data. Commercial real estate remains a secular problem: office demand is impaired by remote work and AI, making conversion and refinancing difficult. Inflation is likely to keep falling because rent and used-car price declines are already working through with lags. The Fed is trying to avoid a panic pivot like 2018 by maintaining credibility and keeping policy tight even as growth slows.

Data Points: Fed funds projection (median, 2023 dot plot): 5.6% - June dot plot, up from 5.1% in March Fed funds projection (March dot plot): 5.1% - Earlier FOMC projection for 2023 rates Members expecting 5% or lower (March): 10-11 members - March dot plot distribution at lower rate expectations Members expecting 5% or lower (June): 2 members - June dot plot distribution narrowed sharply Unemployment rate: 3.7% - Current labor market backdrop discussed as lagging indicator Continuing claims, year over year (U.S.): +18% - Broad-based rise in unemployment insurance continuation claims Continuing claims, year over year (California): +20% - California showing greater labor-market deterioration U.S. population in states with rising continuing claims: 91% - Used to argue the labor-market slowdown is widespread Employee Retention Credit total: $205 billion - Fiscal support still flowing into the economy since CARES Act Employee Retention Credit in April: $20.7 billion - Recent IRS data cited as ongoing stimulus Chapter 11 bankruptcies year over year: +105% - Epiq data for May Large bankruptcies pace: Fastest since 2009 - Bloomberg-tracked large filings Top quintile share of consumption: More than 40% - Explains why wealthy households still sustain spending Core CPI contribution from used cars: 34% - Used cars accounted for a large share of monthly core inflation increase Trueflation reading: 2.54% - Real-time inflation measure cited as falling, led by housing Unemployment forecast change: 4.4% to 4.1% - Fed lowered year-end unemployment projection GDP forecast change (2023): 0.4% to 1.0% - Fed raised growth projection, signaling resilience Fed balance sheet: ~$8 trillion - Booth says this footprint is too large and destabilizing in Treasury markets Potential balance sheet by 2025: $6 trillion - New York Fed scenario referenced as a possible endpoint Commercial real estate lending pullback: Fifth Third exited the business - Example of banks pulling back rather than just repricing loans Retail/commercial real estate occupancy example: New York offices 50% occupied - Used to illustrate office-market weakness Potential housing supply: More units online in next 18 months than since they were born - Booth's claim that multifamily supply is surging

Pivotal Quotes: "July is live. Anything can happen, anything goes." — Danielle DiMartino Booth: Explaining Powell's use of Fed code to keep the possibility of another hike open "You cannot justify keeping quantitative tightening going if you acquiesce to what the press pool was desperate for him to acquiesce to today, which was, this is when I see the first rate cut." — Danielle DiMartino Booth: Arguing that QT and rate cuts are incompatible in the current policy stance "They showed them on the piece of paper, the dot plot, but if they don't show it in July, September, then they wouldn't have delivered as well, right?" — Host: Pressing on whether the hawkish dot plot needs follow-through from the Fed

Implications: Listeners should expect tighter financial conditions to persist even without immediate hikes. QT, labor weakness, CRE stress, and easing inflation suggest the Fed is nearing the end of hikes, but not the end of restraint. Credit, refinancing, and bank lending may worsen before easing arrives.