Powell Invokes ‘Whatever It Takes’ In Jackson Hole For No Reason, Speech Skews Dovish

Jerome Powell’s Jackson Hole speech is out and it in addition to the scenic Wyoming backdrop, his comments are set against turmoil in emerging market assets and harsh words from Donald Trump, who this week took his criticism of Fed policy up several notches, going so far as to tell Reuters that he expects the Fed to “do what’s good for the country”.

For the President, “what’s good for the country” is the Fed taking a pause on rate hikes in the interest of pushing the dollar lower.

Powell has been steadfast in his upbeat assessment of the U.S. economy and as we never tire of reminding folks, the irony here is that the reason the Fed has to lean so overtly hawkish is down to the prospect that late-cycle fiscal stimulus pushes up inflation. Trump’s trade war also has the potential to drive up domestic prices, especially in the next round of 301-related tariffs which will hit consumer items.

Trump’s comments sent the dollar lower in four out of five sessions this week, a blow to crowded positioning. In the week through last Tuesday, USD net longs jumped another $1.4 billion to a new fresh “since January 2017” high at $24.3 billion overall.


Meanwhile, the curve continues to flatten and the spec short in the long-end of the curve is further evidence that the market is inclined to believe Powell will be reluctant to bow to pressure from the White House. Some Fed officials pushed back on Trump this week (more on that here).

Powell has an opportunity to strike something of a middle ground if he so chooses. He could move ahead with the fully priced September hike but package it in a dovish wrapper predicated on the turmoil in international markets. The Fed minutes, out Wednesday, did contain some brief allusions to that turmoil.

In any event, the text of Powell’s speech in Jackson Hole finds the Fed chair noting that gradual rate hikes are the best strategy when it comes to navigating the Scylla and Charybdis of doing too much (i.e., hiking the economy into recession) or doing too little (i.e., risking an overheat). Obviously, the chances of an overheat increased when Trump decided to pile fiscal stimulus atop an economy operating at or near full employment.

“I see the current path of gradually raising interest rates as the FOMC’s approach to taking seriously both of these risks,” Powell says, adding that “with solid household and business confidence, healthy levels of job creation, rising incomes, and fiscal stimulus arriving, there is good reason to expect that this strong performance will continue”.

Right. But the problem with that for Trump is that he (the President) wants to have his cake and eat it too. He wants to hold press conferences in front of the White House to celebrate quarterly GDP data, but he doesn’t want the Fed to acknowledge the strength inherent in that same data by gradually hiking rates.

Powell continues:

 The literature on structural uncertainty suggests some broader insights. This literature started with the work of William Brainard and the well-known Brainard principle, which recommends that when you are uncertain about the effects of your actions, you should move conservatively. In other words, when unsure of the potency of a medicine, start with a somewhat smaller dose. As Brainard made clear, this is not a universal truth, and recent research highlights two particularly important cases in which doing too little comes with higher costs than doing too much. The first case is when attempting to avoid severely adverse events such as a financial crisis or an extended period with interest rates at the effective lower bound.

In such situations, the famous words “We will do whatever it takes” will likely be more effective than “We will take cautious steps toward doing whatever it takes.” The second case is when inflation expectations threaten to become unanchored. If expectations were to begin to drift, the reality or expectation of a weak initial response could exacerbate the problem. I am confident that the FOMC would resolutely “do whatever it takes” should inflation expectations drift materially up or down or should crisis again threaten.

While inflation has recently moved up near 2 percent, we have seen no clear sign of an acceleration above 2 percent, and there does not seem to be an elevated risk of overheating.

This is good news, and we believe that this good news results in part from the ongoing normalization process, which has moved the stance of policy gradually closer to the FOMC’s rough assessment of neutral as the expansion has continued.

As the most recent FOMC statement indicates, if the strong growth in income and jobs continues, further gradual increases in the target range for the federal funds rate will likely be appropriate.

That bit about “no clear sign” of an inflation overshoot seems to skew dovish as does the bit about there not being “an elevated risk of overheating.”

I’m not sure what the point of invoking “whatever it takes” there was, but I’m sure Fed watchers will have something to offer on it.

“[This is] a touch on the dovish side,” ABN Amro’s Georgette Boele says.

Generally speaking, this seems pretty balanced, though. I’m not sure there’s a ton in here that’s going to shift the narrative either way, although the knee-jerk reaction from markets was clearly dovish as the dollar and yields fell. That’s probably down to folks just being happy to have this over and done with.

You decide…

Full speech

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3 thoughts on “Powell Invokes ‘Whatever It Takes’ In Jackson Hole For No Reason, Speech Skews Dovish

  1. Mr. Heisenberg:

    You’ve noted elsewhere that it’s too bad that Powell is not an economist. I respectfully disagree.

    As a rule, economists have smoked the hopium that they offer to masses: the idea that theirs is a real science, one that can be used to conform the economy to their wishes. While so doing they can banish market downturns and unemployment and guarantee unending prosperity for all.

    Since the beginning of the GFC, they have tried a seemingly infinite number of remedies: the Twist, numerous round of QE, buying “assets” at par that could not otherwise be unloaded except at a steep discount…. Supposedly, they have saved us from disaster.

    A healthy economy can withstand long-term rates of around 5 percent. Yet the suggestion that such rates might rise to a mere three percent is enough to give the markets a heart attack. No, prolonged periods of pursuing a near-zero interest rate have merely created the illusion that all is well.

    So what is to be done? Ten years of NIRP have created ever larger misallocations of capital. In other words, continued NIRP cannot save us from eventual meltdown. It will, however, make things worse the longer that day of reckoning is forestalled.

    We should exchange the hopium for our one true hope: continue raising rates. Will it cause market collapse? Might it lead to higher unemployment and corporate bankruptcies? Probably, though only for the short- to mid-term while misallocations are liquidated.

    Hopefully, because Powell isn’t an economist, he can clearly see the wisdom of this course of action. Hopefully, too, he has the moral courage to carry out that policy.

    Ideally, he has the ability to spin things so that the markets don’t freak out while he is administering the medicine. I, however, am just relieved that someone with sense is now in charge.

    Keep up the good work.

    1. Ask yourself this: if you just let what you believe to be a group of mad scientists (in this case economists), create a race of dangerous mutant guinea pigs (in this case bubbly markets), and those guinea pigs were then released into the wild, who would you rather be in charge of trying to get a handle on that situation? The people who created the guinea pigs and therefore know the most about them, or a lawyer with less in the way of formalized training when it comes to how to create mutant guinea pigs?

  2. Broadly speaking science can be divided into two types: pure, which uses the scientific method (observation, formulation of theory, experimentation to test those theories) to determine the principles under which the world operates; and applied, in which engineers employ knowledge of those principles to solve some problem. So, for example, pure chemists such as Boyle and Charles derived various laws concerning gases. Later an applied scientist, Carrier, used those laws to develop air conditioning.

    On the other hand, meteorology is highly developed as a pure science, but it is somewhat lacking with regard to application. Yes, we can make some localized changes to the weather (like cloud seeding to produce rain), but we cannot stop a hurricane or a tornado.

    This isn’t because meteorologists are stupid or lazy. Rather, weather systems are so complex, with a seemingly infinite number of inputs, that it is difficult to understand what they are going to do.

    For decades, meteorology was little more than seventh-grade science. They made weather observations and built up a database. Then, after further observations, they discover that today the barometric pressure, wind direction and speed, temperature and humidity are so and so. After consulting their database, they find that there is a 90 percent chance that it will rain the day after tomorrow. Weather is so complex that this was the best that meteorologists could come up with. Now there are computerized models, but I doubt that their predictive ability is significantly better than simply using the database. And if they don’t truly understand the weather, they certainly can’t achieve a particular outcome.

    With that in mind, let’s consider your argument (allow me to paraphrase):

    “Assuming that a mad scientist produced a race of dangerous mutant guinea pigs, those scientists would be best qualified to deal with them. By the same token, if you believe that the economists are responsible for frothy, bubbling markets, shouldn’t we choose the economists to fix them?”

    First, I don’t believe that the economists created the problem. The Wall Street houses are chiefly responsible, though in all fairness there is plenty of blame to go around. The economists merely created an environment in which others could work their mischief.

    Second, granting for the sake of argument that economics is indeed a science, what type of science is it? Is it more like chemistry or meteorology?

    Do economists test their theories through the use of controlled experiments? No.

    In order to achieve a particular outcome, they have to understand how the economy works. Do they?

    I remember former-Fed Chairman Bernanke stating that no one could have predicted the Global Financial Crisis. (This despite the fact that from 2005 onward I read many articles warning of imminent danger.) If we take Bernanke’s statement at face value, what does this tell us about the Fed’s economic insight?

    Also consider (as I noted in my previous post) that the Fed has tried all sorts of measures: the Twist, numerous rounds of QE, asset purchases…. If the Fed really understands the economy and if they indeed know how to make it dance to their tune, why didn’t they apply the correct remedy the first rattle out of the box? Or at least at some point over the course of last ten years?

    In point of fact, we are in some ways worse off than we were when the GFC started. The bubbles are bigger and the near-zero interest rate policy has done possibly irreparable harm to the pension funds.

    Ideally, we should choose someone like Volcker. He realized the limitations of economic theory and took the radical step of raising rates to 14 percent, if I remember correctly. This got rid of a lot of misallocations and paved the way for the prolonged period of prosperity that we have experienced since.

    If we can’t have Volcker, let us at least get someone (economist or no) who has the courage to do what needs to be done.

    Mr. Heisenberg, I have the utmost respect for you and your writing, and I agree with the great majority of what you say. Keep up the good work.

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