Fed Watch: Powell Hedges...And Probably Secures A Second Term

Federal Reserve Chairman Jerome Powell appears to have successfully walked the tightrope of market expectations with his Jackson Hole speech on Friday, reassuring those who want the Fed to start reducing its monetary stimulus while placating those who don’t want a rate hike anytime soon.

Powell said the Fed would start to taper its $120 billion in monthly asset purchases by the end of the year—not, as some have called for, in October. And he added:

“The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test.”

The Fed chairman spent a lot of time explaining why he still thinks the current inflation number, which is relatively high at more than 4%, as the Fed measures it, will be transitory. He went into the weeds a bit to demonstrate how complex policymakers’ understanding of inflation is.

Stock market investors took all this as bullish, and economists adjusted forecasts for the first rate hike now in early 2023.

Powell may be right about inflation being transitory and the economy needing stimulus amid COVID uncertainties, but we’re not used to optimism from a Fed chairman. We may feel less confident that he has our back if he’s leading the charge into the breach.

Skillful Move Before New Fed Appointments

But his successful tightrope performance may have pushed his re-nomination across the finish line. Reports are seeping out that the White House staff that is doing all the decision-making in the Biden administration has decided on a compromise—naming Powell to a second term as Fed chairman and Governor Lael Brainard, the only Democrat on the board, as vice chairman for supervision to replace Republican appointee Randal Quarles, whose term in that position expires in October.

This will keep those who think Powell is doing a good job happy and ensure continuity and stability in monetary policy in these still-troubled times. Naming Brainard to the supervisory post will put a proven regulatory hawk in that job and appease progressives who see Powell’s main defect as his negligence in reining in banks.

Brainard, who first hoped to be Treasury secretary and then hoped to be Fed chairman, will presumably continue to be a trouper and be content with this lesser role.

The White House can then fill the open seat on the board with someone who is a certified progressive, and tilt it further in that direction by finding a suitable successor to Vice Chairman Richard Clarida, another Republican appointee whose term as governor conveniently expires in January.

Thus you would have a seven-member board with three progressives and a malleable chairman beholden to the administration for keeping him in the post. Whether this shift in emphasis will lead to sound monetary policy, or good bank regulation, remains to be seen.

Summers Warns Inflation May Not Be Transitory

Larry Summers, the former Treasury secretary who had also hoped at one point to be Fed chairman, weighed in again in a Washington Post column to warn about the dangers of these asset purchases, comparing the month-by-month decisions to maintain them to the short-term view that resulted in the military debacles of Vietnam and Afghanistan.

Summers argues that the reasons for re-introducing quantitative easing at the onset of the pandemic no longer apply and the asset purchases are shortening the maturities of government debt in a way that makes no sense. He also objects to inflating asset prices because it favors the wealthy and creates bubbles.

And once again this Harvard economist warns that inflation may not be transitory, as evidence mounts that increases in the price of labor and housing may be sustained, and even supply-chain shortages threaten to last longer than anticipated.

It may be just sour grapes on Summers’ part, but it’s important to keep in mind that he is an economist and Powell is not.