What Jerome Powell failed to do: set the stage for higher rates

The real news from the Federal Reserve on Wednesday was not in what it did, but in what President Jerome Powell did not. The thing the ...


The real news from the Federal Reserve on Wednesday was not in what it did, but in what President Jerome Powell did not.

The thing the Fed’s policy committee did – announce that the central bank would phase out its stimulus bond-buying program – was highly telegraphed and comfortably in line with investor expectations.

The thing Mr Powell did not do was give a hint that a persistently high level inflation in recent months, it has rethought its patient approach to raising the Fed’s target interest rate. Instead, he reiterated his long-held belief that high inflation was primarily caused by disruptions to global supply networks and other pandemic spillover effects – issues the Fed can’t do much about. thing.

It is a delicate moment. President Biden must decide to renew Mr. Powell for a second term at the head of the Fed. High inflation is causing economic discontent among Americans, according to polls, and helping to lower the president’s approval ratings. Global bond markets have been roundabout amid uncertainty about the end of the era of ultra-low interest rates.

On interest rates, Powell dismissed the thinking of the heads of several other major central banks and a handful of his own colleagues. They believe that excess demand in the economy is a big part of the inflation problem and that rate hikes would help address it – and that the current high inflation could be embedded in economic decision-making, with long-term consequences.

If he had expressed more concern about these inflationary pressures, it would have been a signal that the Fed could act to raise rates more sharply than it had expected. The Bank of Canada, the Reserve Bank of Australia and the bank of england recently did just that. Several central banks in Eastern Europe are going further by raising their rates aggressively in an attempt to fight inflation (notably a rate hike of 0.75 percentage point by the Polish central bank Wednesday).

Mr Powell himself has essentially conceded in recent appearances that the surge in prices due to supply disruptions is set to last longer than he expected. He said in end of September that it was frustrating that supply chain bottlenecks did not improve and could get worse, and said that would keep inflation going longer than the Fed had thought.

But he was firm on Wednesday in not suggesting those developments were a reason to speed up the Fed’s interest rate hike plans. He suggested they should wait until the reduction in bond purchases is over and Fed officials conclude the economy has peaked at jobs.

“We understand the challenges high inflation poses for individuals and families,” Powell said Wednesday. But he continues: “Our tools cannot alleviate supply constraints. Like most forecasters, we continue to believe that our vibrant economy will adjust to supply and demand imbalances and that, as it does, inflation will drop to levels much closer to our target. longer term of 2%.

With language like that, he refused to adopt the use of the “open mouth policy” or essentially try to allay inflation fears by using more specific language to suggest that the Fed was ready to take immediate action to avoid higher prices.

He seemed to be applying the labor market lessons of the 2010s by setting the course for the central bank. During this decade, unemployment continued to decline, with labor market participation increasing more than many analysts had expected. In retrospect, the Fed may have erred in raising interest rates prematurely, slowing the process of improving the labor market.

In a 2021 context, that means allowing for greater post-pandemic labor market healing before assuming, for example, that many Americans who currently say they are not in the workforce will return as health conditions improve. public will improve.

“There is room for a lot of humility here as we try to think about what the maximum job would be,” Mr. Powell said. The last business cycle, he said, has shown that “over time you can get to places that didn’t seem possible.”

He also seemed to be drawing another lesson from the 2010s, namely those learned during the 2013 “tantrum” when world markets went haywire when President Ben S. Bernanke decided to cut back on bond purchases from the United States. Fed.

A key lesson from this era is that tapering should be wired well in advance and separated as much as possible from the decision to raise interest rates. During this episode, markets took a double whammy as they envisioned both a slowdown in Fed bond purchases and a rapid rate hike.

With assurances Wednesday that the Fed was in no rush to raise rates, Powell was essentially trying to avoid the problem.

None of this means that the era of near zero rates will last as long as it did after the global financial crisis. Mr Powell said so when he said the United States could achieve “maximum employment,” a target legally mandated by the Fed, by the second half of 2022, which would pave the way for rate hikes.

But if the 2021 spike in inflation proves to be more than temporary, Mr Powell’s decision to stick to his guns at this meeting will appear to be a missed moment to join other English-speaking countries in the world. use of monetary policy to try to eradicate it.

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Newsrust - US Top News: What Jerome Powell failed to do: set the stage for higher rates
What Jerome Powell failed to do: set the stage for higher rates
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