Thoughts From The Divide – Stars
“Uncertainties, both old and new, complicate our task”
In advance of Jackson Hole, Larry Summers wrote a letter to Santa op-ed listing some things that he hoped Jerome Powell would do at the upcoming meeting. On Larry’s wish list this year:
emphasize that the Fed gained credibility by reversing policy (i.e., doing what Larry said)
reject ”suggestions that inflation is securely under control”,
recognize that “the dramatic change in the U.S. fiscal position has major implications for monetary policy” (paging Warren Mosler and the St. Louis Fed),
respond to “the growing chorus suggesting that the Fed should adjust its inflation target” (that means you, Furman),
and lastly, Summers hoped the chairman would “remain agnostic about the future path of policy, even as he emphasizes the importance of containing inflation”.
As it would happen, Powell didn’t bring Larry a lump of coal (surprisingly valuable these days) but instead broadly delivered. Skipping over any potential embarrassment surrounding the policy reversal, Powell restated that while “inflation has moved down from its peak… it remains too high”, reaffirmed that “Two percent is and will remain” the Fed’s inflation target (till it ain’t), and confirmed that the Fed would “keep at it until the job is done” (definition to follow) while admitting that risks and uncertainty underscored “the need for agile policymaking”. We would note that while there was a glancing reference to fiscal policy, Powell mentioning “fiscal transfers” in explaining the inflation seen in durable goods, the chairman stuck to his usual pattern of pleading the fifth regarding matters that are “Congress’ job”. (On that subject, it is worth noting that while fiscal transfers to consumers are no longer in vogue, there are a number of programs, tax breaks, etc… that are a significant fiscal tailwind. It will be interesting to see how well these offset a few of the potential headwinds).
Meanwhile, though Summers was hoping for an agnostic Powell, there is an increasing chorus of voices calling for the Fed to play nice. The latest NAHB commentary included a cry of uncle, with the head economist saying that the latest housing data “should convince Fed hawks that now is the time to pause and let the current restrictive monetary policy finish the job”. The Dallas Fed’s latest survey also contained several voices flagging weakening conditions, “our industry is in a technical recession” and “we have seen broader markets weaken”, with one concluding that “This is the time to stop raising interest rates”. Calls one way or another aside, Powell, perhaps thinking of the sting of holding on to “transitory” for too long, concluded with a preemptive butt-covering by giving us the exceedingly quotable caveat that “as is often the case, we are navigating by the stars under cloudy stars”. Perhaps the Chair thinks the fault is in our stars?
P.S. Carrefour’s CEO warned that high prices are forcing French consumers “to make massive cuts to spending” as food inflation in France remains “more than twice the overall French inflation rate of 5.1%”.
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