Powell is best when he sticks to the script
Powell didn’t fall into that trap Friday in Jackson Hole, and he can thank the scripted format. Given this pre-planning, Powell was able to effectively and unambiguously combat nearly all of the accommodating narratives that have circulated in recent months.
• He said July’s encouraging inflation reading, while welcome, “is well below what the committee will need to see before we are confident that inflation is coming down.”
• It corrected the record indicating whether the fed funds rate had reached a level consistent with “neutral”. (An off-the-cuff comment about the “neutral” rate in July had led markets to think he might stop raising rates soon, but he clarified that he was referring to the long-term neutral rate which is appropriate when the growth is balanced and inflation is around 2%.) “In the current circumstances, with inflation well above 2% and an extremely tight labor market, longer-term neutrality estimates are no place to pause. or shutdown,” Powell said Friday.
• Finally, he made it clear that the Fed has no plans to reverse course and cut rates anytime soon, noting that “restoring price stability will likely require maintaining tight policy for some time.” time”. He added: “The historical record strongly cautions against premature policy easing.”
Frankly, nothing Powell said was entirely new, but the packaging was better. Powell has long said he needs to see a “series” of reports on improving inflation before changing his tune. And anyone who had bothered to dig into the Fed’s summary of economic projections could have dispelled potential misunderstandings regarding its earlier remarks about “neutrality” and the committee’s commitment to keeping rates higher for longer. But this speech was almost impossible to misinterpret from the start.
Needless to say, carefully tailored market messages are critically important for a Fed Chairman facing the worst inflation in 40 years. The Fed can only control short rates, and it depends on the markets to transmit its policies more broadly through higher borrowing costs and lower asset prices. It is these mechanisms that balance demand with supply, in part by making credit more expensive and, more grossly, by making people feel a little less wealthy. If the markets don’t play along, it makes the Fed’s job harder. Fed policies worked in some parts of the market – mortgage rates quickly cooled the housing market – but corporate bond spreads and stocks were somewhat defiant.
Powell obviously performs better in this format. The message he’s been trying to convey for months has finally been delivered clearly and consistently, and now fellow Federal Open Market Committee voters won’t need to rush to clarify the president’s intentions as they have. done after the recent press conferences. Powell should use Friday as a model going forward. But, of course, he will also have to appear before the press at next month’s post-meeting conference (as he should; transparency is a public good). Hopefully he finds time for some media training in the meantime.
More other writers at Bloomberg Opinion:
• Jerome Powell fights inflation — and wins: Karl Smith
• This economy is proving too difficult for economists: Jared Dillian
• The winners of inflation must help the losers: Thomas Black
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Jonathan Levin has worked as a Bloomberg reporter in Latin America and the United States, covering finance, markets, and mergers and acquisitions. Most recently, he served as the company’s Miami office manager. He holds the CFA charter.
More stories like this are available at bloomberg.com/opinion