Jay Powell focuses too much on the present
The writer is president of Queens’ College, Cambridge and an advisor to Allianz and Gramercy
Over the years, the annual central bank conference in Jackson Hole has seen Federal Reserve chairs address immediate policy issues as well as longer-term, more academic ones, which involve the economic and institutional context of the policy development.
Current circumstances demanded that Jay Powell, the current president, do both, i.e. correct the policy mistakes of the past 18 months, attempt to realign monetary policy expectations and pave the way for the reset of the guiding policy framework. As it happens, his brief speech (just under nine minutes) last Friday largely attempted only one of those three. By focusing on the present, it left much to say while less than fully exploiting a long-awaited opportunity to improve policy effectiveness.
There are five reasons why Powell had to deal with issues related to the past, present and future. First of all, the weather was not good for his presentation at last year’s gathering. His characterization of inflation as transitory, his predictions of the economy and his elucidation of required policy responses failed. They are now part of the Fed’s four-part policy error that involves inadequate analysis, poor forecasts, poor communication and belated policy responses.
Second, the Fed’s slippages have deprived the country (and, therefore, the global economy) of a better initial policy response and the soft landing that can come with it. If left uncorrected, it is a mistake that builds on itself, compounding the problems of low growth, high inflation, rising inequality, and future financial instability.
Third, markets have shifted from following central bank directives to circumventing them. Indeed, it is perhaps the least credible Fed in estimating markets since the 1970s. Its quarterly forecasts have been repeatedly dismissed as fanciful, and its communication is seen as lacking the consistency necessary to effective political guidance. It is a combination that slows the necessary shift in market mindset from a predominantly cyclical view, including the romanticization of an early policy pivot to lower rates, to a more structural view.
Fourth, the Fed is encumbered with a policy architecture – the “new policy framework” – that is not fit for purpose. Adopted two years ago, it was designed for the past world of insufficient global demand. As a result, it sits somewhere between ineffective and counterproductive in the current and future world of contested global supply.
Finally, the Jackson Hole audience is dominated by economists, the majority of whom both understand the importance and urgency of a politically independent central bank and are concerned about the path this Fed is taking.
In this context, Powell correctly opted for a particularly hawkish tone. He rightly said that “high inflation has continued to spread through the economy”, that “there is clearly work to be done” to bring inflation under control, and that the Fed must “continue “. He also said it would involve “a sustained period of below-trend growth”. In the process, he attempted to clean up his month of july remarks that the former US Treasury Secretary Larry Summers characterized as “analytically indefensible” and “inexplicable”.
Illustrating a more general sensitivity to reputational risk and the resulting political vulnerability, Powell combined this warmongering tone with reference to several of his predecessors. The attempt to borrow from past credibility included the quote from Paul Volcker whose inflation-fighting reputation is as strong today as it was in the 1980s.
Equally important is what Powell failed to do. He has yet to take responsibility for the past 18 months of Fed mistakes, including the mischaracterization of economic and political issues in last year’s speech. It must also still provide an avenue for much-needed revisions to the policy framework.
In a world of perfect foresight, Powell’s speech in 2021 would have focused on monetary policy at a time of sudden high inflation and, this year, on restoring the credibility and effectiveness of central bank policy. in an even tougher world of rapidly slowing global growth, worsening inequality and high and widespread inflation. Instead, his unusually short speech dealt mostly with the present, but omitted important past and future issues.
I suspect we will view this year’s Jackson Hole speech as a missed opportunity for the Fed to regain control of its policy discourse, as well as outline what is needed to overcome the considerable policy challenge facing the most powerful and most important in the world. Central bank.