In Wednesday’s presser for the Fed’s most recent Summary of Economic Projections (SEP), Chairman, Jerome Powell, took a different tack on inflation, one that embraced humility over hubris, and walked right up to the line of an acknowledgement that the Fed had been wrong about the duration and intensity of rising prices for the better part of 2021. In doing so, he may – may – have accomplished something heretofore unimaginable, at least for some. In admitting in his opening statement that “supply disruptions have been larger and longer than anticipated”, Powell finally, albeit subtly, coughed-up a ‘my bad’ in regards to the Fed’s position that the price destabilization witnessed since late 2020 has been “transitory”. And in doing so, won back some credibility – Fed cred – for the institution and himself.
Today’s macroeconomic crosscurrents are nothing short of extraordinary. Especially when you consider the potential ‘unknown unknowns’ that could arise from the Russian invasion of Ukraine, and the attendant, unprecedented economic sanctions that have subsequently been imposed – seizing the assets of oligarchs is one thing, seizing the foreign exchange of a country’s central bank has no modern historical precedent.
And, the timing of this, of course, could hardly be worse, coming on the heels of the pandemic, and its attendant, unprecedented central banking response, manifested in the historic expansion of the money supply (more than doubling) reflected on the Fed’s balance sheet.
The domestic consequences of these factors are evident to most Americans – price destabilization (higher) in goods and services, and a ‘white-hot’ employment market with 1.7 job openings for every person seeking a position.
So, the Fed’s new and more aggressive plan for tightening makes a lot of sense. Especially in light of current geopolitical challenges, and how, at least short-term, they have flowed into higher commodity prices, in food, metals and energy.
In addition to increasing the number of interest rate hikes expected for 2022, the Fed signaled it is preparing to run-off its balance sheet, going beyond the termination of U.S. Treasury and MBS purchases, and ending its reinvestment of principle payments from the maturation of currently held securities.
This is unquestionably a much more aggressive policy for ‘cooling down’ the economy, and welcome news for many of the Fed’s critics.
In addition to the policy changes, Powell also provided a little peek into this Fed’s philosophy. In response to a question from reporter Michael McKee, at Bloomberg TV, on whether or not the Fed would continue raise rates if employment reverses but prices still remain elevated, the chairman said this in response:
“The goal, of course, is to restore prices stability while also sustaining a strong labor market. We have a dual mandate, and they’re sort of equal. But as I said earlier, you know, price stability is an essential goal. In fact, it’s a precondition, really, for achieving the kind of labor market we want.” – emphasis added
Coming from an institution that’s known for its exacting use of verbiage, I found this particular exchange refreshingly honest and insightful. I’m of the opinion that the Fed’s dual mandate is more aspirational than actionable, in that its monetary tools (open market operations and discount rate modulation) tend to have a more direct and immediate effect on prices rather than on labor. In this context, I found myself doing something I haven’t done in quite some time – agreeing.
None-the-less, the takeaway from this week’s statement has less to do with the policy and more to do with the frankness of the chairman. In acknowledging that it didn’t correctly anticipate the durability and degree of inflation, the Fed recaptured some of the integrity and credibility (I believe) it had lost over the past 36 months, at least in my view. And its further acknowledgement that the focus of monetary policy is price stabilization, gives me a bit more comfort.