Jerome Powell, “monetary expert”

Powell gave a speech: “Remarks on Monetary Policy”:

The Committee said that it will want to be reasonably confident that inflation will move back to 2 percent over the medium term. On a 12-month basis, headline inflation in February, as measured by the personal consumption expenditures price index, stood at 0.3 percent; meanwhile, core inflation, which excludes volatile energy and food components, was 1.4 percent. These low current readings are partly a consequence of two transient shocks–the dramatic decline in oil prices and the effect of the appreciation of the dollar on import prices. Before those shocks, both headline inflation and core inflation were running at about 1.5 percent. When the effects of these shocks pass, I expect that inflation will return roughly to those earlier levels and then rise gradually to our 2 percent objective over the medium term as labor and product markets tighten further.

He´s an “expert” because:

1 He believes (as most in the FOMC) that interest rates are a pretty good indicator of monetary policy)

2 He believes (as most in the FOMC) that inflation is a “price phenomenon” (i.e. likes to reason from a price change)

3 He believes (as most in the FOMC) that there are “long and variable lags” in the effect of monetary policy

As the chart shows, from the “get go” on the 2% inflation target in January 2012, inflation has been mostly falling below the target, It was around 1.5% in mid-2014, just before the oil price fall and dollar appreciation. But it was also 1.5% 18 months before that, in early 2013.

Powell speaks_1

Powell speaks_2

If he paid attention to better indicators of the stance of monetary policy (like NGDP growth and (less precisely) core inflation) he would have difficulty believing that inflation will “turn up”.

Powell speaks_3

Powell also brings up the effects of financial crisis:

All else equal, a decision to return interest rates to more-normal levels implies that the economy is nearing its capacity. The financial crisis did significant damage to the productive capacity of our economy, and the damage was of a character, extent, and duration that cannot be fully known today…

Let us take a brief look at the implications of severe financial crises for economies generally. Studies document that severe financial crises around the world have typically left behind large and sustained reductions in the level of output.5 The recent crisis is no exception, and figure 1 shows such an effect for the U.S., U.K., euro-area and Canadian economies since 2008. The underlying pattern is an interesting one. Economists and policymakers have tended at first to view a decline in output as a cyclical shock to demand and to realize only gradually over time that a crisis has done substantial and lasting damage to the productive capacity of the economy.

The charts in the link to his figure 1 refer to real GDP (RGDP). If he were smart, he would have checked that pattern against the (monetary policy induced) nominal GDP (NGDP) pattern. He would have found that for those countries the NGDP pattern is the same, all having let NGDP drop significantly below trend.

If he really wanted to get to the bottom of the issue, he would have tried to find out how the crisis evolved regarding countries, like Australia, Israel and Poland, which did not let NGDP fall below trend. “Miraculously”, those countries did not experience a recession (fall in RGDP).

If he did all that, he would have to conclude that the “substantial and lasting damage to the productive capacity of the economy” rests heavily on the shoulders of the Fed and its misguided monetary policy!

That, however, will never happen. As Bernanke has indicated in the title to his forthcoming book, as the “leader of the pack” he had the “Courage to Act”!


3 thoughts on “Jerome Powell, “monetary expert”

  1. This is an excellent analysis of where Mr. Powell is incorrect.
    But I couldn’t help but notice the following quote:
    “…a decision to return interest rates to more-normal levels implies that the economy is nearing its capacity.”

    Really?? I think all that is implied by this decision is that the FOMC doesn’t have a grip on reality.

    If they (the FOMC) are constantly lowering estimates of NAIRU, I am skeptical that any such decision is based on any known facts. For the people who need the simplified version, what this says is that we are nearing a point where all of the people who want jobs have one and/or all of the jobs that are going to be created have been. Anyone looking at the U-6 and or comparing current LFPR to the pre-recession LFPR can get a grip on the idea that we’re nowhere near capacity, while the rest about what there is left for them to do is a mere guess that is supported by none of the typical metrics I’ve seen. I say ‘prove it’.

  2. Egads. Jerome Powell says the financial crisis has inflicted deep damage on U.S. productive capacity. The financial crisis caused by overly tight money. So now we must keep money tight because we have lost productive capacity.
    If Powell were a doctor, he would say the cure for anemia is leeches.
    Powell is an active menace to U.S. prosperity.

  3. Powell’s CV shows no training in economics. He may be useful in his role as a bank regulator. If so, it shows that rather than “auditing the Fed” you should think of “splitting the Fed” into a UK-style MPC of monetary experts and an FPC of broader expertise. The latter body is there to stop banks and others gaming the former’s LOLR role.

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