‘That Could Have Been Me’

Jerome Powell’s press conference was largely uneventful for the majority of market participants, but it featured a number of notable soundbites and a bit of tragicomedy.

Powell stuck mostly to the script when pressed on issues related to what counts as “substantial forward progress.” He also refused to be baited into any kind of definitive timeline on… well, on anything really.

He didn’t budge on the “transitory” characterization of the coming inflation spike either. Not an inch. It’s unlikely, he said, that “inflation would move up while there’s still significant slack in the labor market.”

While I personally believe that’s accurate, I’m also adept at arguing both sides of the coin. We all know the connection between inflation and employment has become but a “faint heartbeat,” as Powell once described the Phillips curve during an exchange with Alexandria Ocasio-Cortez. If we can overshoot full employment on the downside without triggering inflation, who’s to say inflation can’t show up when unemployment is still elevated? A broken connection is a broken connection.

“For inflation to move up in a persistent way, that would take some time and that would accompany a very strong labor market,” Powell reiterated. Again, I think that’s correct. But there’s nothing that says you can’t have high inflation, high unemployment and sluggish growth all at once. There’s even a word for that conjuncture.

Steve Liesman asked a predictably ridiculous question, although he can be forgiven because Jim Bullard opened the door earlier this month by accidentally tying the taper discussion to vaccination rates. “[How do] infection rates and the virus calibrate with monetary policy?,” Liesman wondered. “Would you need to be assured there’s not another surge coming before you’d think about thinking about tightening?” He also asked if there were specific virus metrics the Fed would look at as a tapering guide.

Powell brushed him aside. “We’ve just articulated the goals. We haven’t articulated a test for a state of the virus we’d like to achieve,” he said. “We’re not experts on that.”

Asked whether, and to what extent, the Fed sees the dreaded “scarring effect’ manifesting in the real economy, Powell delivered an upbeat, if cautious assessment.

“I would say that so far, we haven’t experienced” the level of scarring the Fed was initially concerned about, he remarked. “We’re not living the downside case.” Of course, he was quick to add the caveats. “We’re a long way from full employment,” he reminded everyone in (virtual) attendance, before warning that going forward, “it’s going to be a different economy.” Powell suggested that at least some services sector workers won’t ever be able to return to their jobs.

“Companies [are] looking to employ more technology [and] fewer people,” he cautioned. “People are gonna need help.” They sure are (figure below).

As for America’s red-hot housing market, which I called a bubble on Tuesday (I previously favored “flaming marshmallow”) Powell promised the Fed is monitoring the situation “very closely,” but reiterated that the market bears little resemblance to 2005 and 2006. “It’s a very different housing market. Households were in very good shape financially prior to pandemic compared to 2006,” he remarked, on the way to conceding that “housing prices are going up.” He blamed strong demand and a dearth of supply. “If you’re an entry-level housing buyer, this is a problem,” he said. “It’s clearly the strongest housing market that we’ve seen since the housing crisis [but] I don’t see financial stability concerns.”

Someone asked about Larry Summers (because of course they did). Why, the reporter wondered, is it “different this time?” “Why are you confident, with the lags in monetary policy, that you can stay ahead of inflation?”

Powell delivered a set of boilerplate remarks before making a pretty forceful (for him, anyway) comment on the Fed’s willingness to crack down if things spun out of control. The boilerplate language was as follows:

We’re very strongly committed to price stability. We’re likely to see upward pressures on prices associated with the reopening. That’s not the same thing as, and is not likely to lead to, persistently higher YoY inflation into the future. It’s the Fed’s job to make sure that doesn’t happen.

He discussed base effects (and quantified them) but noted that although bottlenecks are, almost by definition, temporary, it’s “much harder to predict with confidence how long it will take” for them to resolve.

Then he drove home the point. “We understand our job. We will do our job,” he insisted. In essence, Powell said that “no one should doubt” that the Fed would hike rates rapidly to contain runaway inflation. He didn’t use those words. He would never. Instead, he just referred to “all our tools.”

Then the Q&A devolved into semantics. Asked what he meant when he said the Fed would need to see a “string” of good employment reports to consider declaring “substantial forward progress” achieved, Powell delivered a zinger of sorts. “Well, I can tell you what it’s not. It’s not one.”

Nit-picked further on the Fed’s use of the word “largely” in relation to the factors likely to push up inflation in the near-term, he offered a pretty good explanation considering how annoying the question probably was: “It would have been contentious to say ‘entirely,’ so we just said ‘largely.'”

He was asked why the Fed didn’t see Archegos coming. Powell blamed the banks. “We supervise banks to make sure” they have policies in place, Powell said. “We don’t run their businesses.” He did express some concern about where the losses took place. “Prime brokerage is a well-understood business. It’s surprising that it happened in that business,” he fretted, adding that “there were risk management breakdowns” and that banks seemed unaware of each other’s participation in the same trade. (No comment.)

On Wednesday morning, I suggested someone should mention the tent cities. Sure enough, someone did.

“Are you planning to visit?,” a reporter asked, immediately conjuring awkward images of Powell wandering around a makeshift, outdoor homeless shelter.

“I’ll go visit when it’s no longer a news story,” Powell said.

He should have left it there. But he didn’t.

“I’ve met with homeless people many times. A number of times,” he told the virtual audience. “What you find out is, they’re you. They’re just us.”

“Is there anything specific that you’d be looking to learn there?,” the same reporter pressed.

“Not really,” Powell said. “That could have been you.”

“Me.” He should have said: “That could have been me.”