The real news out of the Federal Reserve on Wednesday was not in what it did, but in what Chair Jerome Powell didn’t do.
The thing that the Fed’s policy committee did — announce that the central bank would gradually wind down its economy-stimulating program of buying bonds — was highly telegraphed and comfortably in line with investors’ expectations.
The thing that Mr. Powell didn’t do was give any hint that persistently high inflation in recent months was leading him to rethink his patient approach to raising the Fed’s interest rate target. Rather, he repeated his longstanding belief that high inflation was mostly caused by disruptions in global supply networks and other ripple effects of the pandemic — problems that the Fed can’t do much about.
It is a delicate time. It is a delicate moment. President Biden must decide if he will re-appoint Mr. Powell to another term at the Fed. High inflation is causing economic discontent for Americans, according to surveys, and helping to drag down the president’s approval ratings. The global bond markets have been in turmoil amid uncertainty over whether the era with ultralow interest rates is ending.
Powell rejected the views of several central bank leaders and a few of his own colleagues regarding interest rates. They think that excess demand in the economy is a big part of the inflation problem and that rate increases would help address it — and that current high inflation could become ingrained in economic decision-making, with long-lasting consequences.
If he had expressed more concern about inflationary pressures it would have been a signal to the Fed that it might increase rates abruptly. Recent actions have been taken by the Bank of Canada and the Reserve Bank of Australia as well as the Bank of England. Several Eastern European central banks are going a step further, aggressively raising rates to try to combat inflation (including a 0.75-percentage-point rate increase by the Polish central bank on Wednesday).
Recent appearances by Mr. Powell have essentially confirmed that rising prices due to supply disruptions will last longer than he had expected. He said in late September that it was frustrating that supply chain bottlenecks weren’t improving and might be getting worse, and said this would hold inflation higher for longer than the Fed had thought.
But he was steadfast on Wednesday in not suggesting that those developments were a reason to accelerate the Fed’s interest rate hike plans. He suggested that those would have to wait until the tapering off of bond purchases was complete, and until Fed officials conclude that the economy has attained maximum employment.
“We understand the difficulties that high inflation poses for individuals and families,” Mr. Powell said Wednesday. But he continued: “Our tools cannot ease supply constraints. Like most forecasters, we continue to believe that our dynamic economy will adjust to the supply and demand imbalances, and that, as it does, inflation will decline to levels much closer to our 2 percent longer-run goal.”
With language like that, he was declining to embrace the use of “open-mouth policy,” or of essentially trying to assuage inflation fears by using more specific language to suggest the Fed had a hair-trigger readiness to take immediate action to head off higher prices.
He appeared to be applying the lessons of the 2010s labor market in setting the central bank’s course. Over the next decade, unemployment continued to fall and the participation rate in the workforce grew higher than many analysts believed possible. In hindsight, it is possible that the Fed made a mistake by raising interest rates too early, slowing down the process of improving the labor market.
This would be in 2021 context. It would mean allowing more post-pandemic healing to the labor market before assuming that, for example, many Americans who say they are not currently in the labor force will return when public health conditions improve.
“There’s room for a whole lot of humility here as we try to think about what maximum employment would be,” Mr. Powell said. The last economic cycle, he said, showed that “over time you can get to places that didn’t look possible.”
Learn the Supply Chain Crisis
He also appeared to be deploying another lesson from the 2010s — namely those learned in the 2013 “taper tantrum” when global markets went haywire as Chair Ben S. Bernanke moved to taper the Fed’s bond purchases.
The key lesson from that era is that tapering should be telegraphed in advance and separated as much as possible form the decision to raise interest rate. In that episode, markets experienced a double-whammy as they envisioned both a winding down of the Fed’s bond buying and rapidly raising rates.
With his assurances Wednesday that the Fed wasn’t in a hurry to raise rates, Mr. Powell was essentially trying to avoid that problem.
This does not mean that the near-zero rate era will last as long as it did following the global financial crisis. Mr. Powell said as much by stating the United States could achieve “maximum employment,” a legally mandated goal of the Fed, by the second half of 2022, which would clear the way for rate increases.
But if the inflation surge of 2021 proves something other than temporary, Mr. Powell’s decision to stick to his guns at this meeting will loom as a missed moment to join other English-speaking countries in using monetary policy to try to stamp it out.
Source: NY Times
