‘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.”


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8 thoughts on “‘That Could Have Been Me’

  1. Powell is no politician and honest. It would only be him with a total collapse . He was born of the meritocracy America and with good advantage,but he is empathetic. Freinds and relatives along the way may not have won the American dream.

    Keep that word out of it……hopefully.

  2. Regarding the word that H defined in the negative above, that is undoubtedly the proper term for the “inflation” witnessed in the housing market. 13 years of underbuilding by 750,000 units or so a year, if I remember the numbers correctly, amounts to quite a cumulative sum of supply disruption. This situation is simply not Friedman’s “monetary phenomenon”. As for the lumber producers and other productive members of the real economy that were able to survive the long depressionary backdrop, now there is demand and they are finally extracting the bailout that only parasitic financial “engineers” ever seem to get in this economic system. I say good for the real producers. The financial community and the new “Lumber Twitter” culture is, mostly, insufferably disconnected from the real world of productive economic activity. If you ask them what remedy is needed to fix this situation, they’d say more fiscal austerity. But only after they get their latest technocratic bailout that doesn’t even have to bother with the pesky process of governance by elected officials. And by thew way, taxing them on the handout is non-negotiable.

  3. I had to laugh out loud when Powell answered “not really,” at least we know he was answering honestly on that one, I have no doubts Jay tries to connect and relate to the common man’s plight, but it might simply not be possible for him to do that no matter how many tents he visits or how many homeless he talks to.

    1. A simpler take is that there is nothing to learn.

      I mean, would you expect to learn much of visiting a tent city or even a favelas in Brazil? Speaking for myself, I’ve got a pretty good idea what either/both are like (and some of the differences too). I don’t need first hand experience. It’s only R politicians who need to experience things first hand, in their very flesh, before they even start to have empathy or understanding.

  4. I have always felt that trickle down was at best greatly exaggerated, and probably a lie….Guns and butter under lbj did a lot of intellectual damage to our government…I remember the misery index(unemployment plus inflation)….

  5. I am constantly amazed that people think Jay Powell was a big earner on Wall Street. He went to work for Carlyle for roughly seven years. He was paid modestly by their standards. People don’t get that being in the middle of the herd is sufficiently lucrative…The stars make the big money..I would say from what I know he is an above average human being for Wall Street. I don’t think he has a secret second family, or a girlfriend half his age….

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