Greenspan, for his part, took an expansive view of the challenges to sustaining disinflation in the post-Volcker period, introducing a risk-management approach to monetary policy that allowed the Fed to factor asset bubbles and productivity into its decision-making. From my perch at Morgan Stanley, I was critical of Greenspan for not staying true to the concerns he courageously raised in his famous “irrational exuberance” speech of December 1996. But he deserves enormous credit for having the mettle to challenge markets at a time of great froth.
Powell appears to have drawn inspiration from Volcker and Greenspan’s steely nerves and apolitical focus. Volcker faced widespread public criticism of high interest rates: farmers blockaded the headquarters of the Federal Reserve Board (where I worked at the time), and senators and congressmen were outraged. Greenspan’s concerns over irrational exuberance generated a strong backlash from Wall Street. Likewise, there was nothing subtle about the political pressure bearing down on the determined Powell as he ambled up to the podium at Jackson Hole on Aug 22.
Financial markets roared their initial approval of Powell’s message that a shifting balance of risks “may warrant adjusting our policy stance”. With futures markets already pricing in an aggressive easing trajectory, the surprise was less in the implications of Powell’s words for the next few meetings of the Fed’s Open Market Committee. Markets reacted more to the rigorous framework that Powell provided as a guide for the future conduct of US monetary policy.
He expounded on the complexities of Fed decision-making, identifying two basic issues — the factors affecting “mandate compliance”, and the considerations shaping the process that the Fed uses to achieve those objectives.
See also: Trump says ‘fairly substantial’ chips tariffs coming ‘shortly’
The dual mandate — price stability and full employment — has created a tough balancing act for the central bank. Powell methodically laid out the factors currently weighing on both, from tariffs and immigration policy (which are affecting supply as well as demand) to the recent underlying loss of momentum in employment and GDP growth. Powell drew comfort from a still-low unemployment rate but emphasised a “curious kind of balance” in the labour market. That is Fedspeak for “precarious,” in that it could quickly give way to higher joblessness. I take this as a key factor in assessing the shifting balance of risks that will guide future policy actions.
Powell’s discussion of policy-framework considerations was somewhat more academic and less of immediate relevance for interest rate setting than shifting labour-market considerations. But this is the area where an independent Fed can exercise the greatest discretion.
Contrary to conventional wisdom, the central bank does not set its own mandate. That comes directly from congressional authority — initially the Employment Act of 1946, with the so-called Humphrey-Hawkins Act of 1978 later adding inflation control. While the Fed has the authority to interpret the objectives of maximum employment and price stability, it enjoys the most freedom in setting the framework by which it aims to comply with legally mandated targets.
See also: US economy expands at revised 3.3% rate on stronger investment
Powell put considerable effort into explaining the Fed’s updated thinking on framework considerations. No big surprises here. In the Fed’s earlier framework review in 2020, real, or inflation-adjusted interest rates were assessed relative to two thresholds: the effective lower bound (ELB) on the downside and “neutrality” on the upside, the latter being an interest rate that neither restricts nor stimulates economic growth or inflation.
The current review removes the ELB as a primary consideration and abandons an average inflation-targeting strategy that allowed the Fed to make up for earlier downside surprises on inflation by permitting a period of offsetting overshoots. The updated framework also makes a similar adjustment to potential shortfalls from maximum employment and reaffirms an inflation target of 2% as “most consistent with dual-mandate goals”.
Powell’s disciplined performance at this year’s Jackson Hole gathering was an extraordinary, Volcker-like act of political courage. By staying on mission in today’s toxic era of political interference, he is an inspiration for Cook and the rest of us. We witnessed nothing short of a truly valiant act of a great American public servant. Welcome to the Pantheon, Jerome Powell. — © Project Syndicate
Stephen S Roach, a faculty member at Yale University and former chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China (Yale University Press, 2014) and Accidental Conflict: America, China, and the Clash of False Narratives (Yale University Press, 2022)
US politics, US economy, Donald Trump, Federal Reserves, US Fed, Jerome Powell
