Jerome Powell, Professional Fall Guy

It wasn’t so long ago when Jerome Powell readily expressed confidence in the Fed’s capacity to engineer the fabled “soft landing.”

Whether or not he believed his own narrative is another matter, but in public, at least, he implicitly assigned relatively high odds to a benign conjuncture wherein rates could rise enough to combat inflation without too much in the way of collateral damage for the broader economy.

Not everyone was buying it. History isn’t exactly replete with examples of soft landings. And because there’s nothing like universal agreement on what constitutes one, there’s ample scope for the Fed’s many critics to suggest soft landings are like yetis — purported to exist by enthusiasts despite no confirmed sightings.

It’s certainly true that the concept of a soft landing is inward looking — selfish, even. Fed tightening has everywhere and always resulted in some manner of “event,” just not necessarily a domestic one. Put differently, Fed hiking cycles always end in tears, it’s just not always America crying.

Eventually, Powell “downgraded” (if you will) his soft landing assessment. A few months back, it became a “soft-ish landing.” That was a pretty clear indication of a shift in the Fed’s thinking.

On Wednesday, Powell told Congress it’ll be “very challenging” to achieve a benign outcome under the circumstances, even as he clung to the notion that there are still “pathways” to lower inflation without a recession. The likelihood of a downturn, he said, isn’t elevated right now, even as growth is slowing.

A recession is “certainly a possibility,” Powell conceded, before reiterating that it’s not the Fed’s intention to induce a downturn. He said the same during last week’s press conference in response to a question from Bloomberg’s Matthew Boesler.

Notably, Powell indicated that the Fed now views the balance of risks as asymmetric. “The other risk is that we [don’t] manage to restore price stability and that we would allow high inflation to get entrenched in the economy,” he said. “We can’t fail on that task.” Last week, speaking to the same trade off, Powell emphasized that failure on the inflation front “isn’t an option.”

You don’t need to be fluent in Fedspeak or particularly adept at recognizing nuance to read between those lines. The Fed would rather see a downturn than they would risk being remembered for sitting idly by as inflation embedded itself across the world’s largest economy. Never mind that they did exactly that for an entire year in 2021, while simultaneously buying trillions in assets (figure below).

“Inflation has obviously surprised to the upside over the past year,” Powell mused on Wednesday, adding that the Fed needs to “be nimble in responding to incoming data and the evolving outlook.”

He was besieged by his fellow Republicans. “The Federal Reserve failed the American people,” Richard Shelby chided. Mike Rounds said Powell will “take the fall” if inflation doesn’t recede, alluding to The White House’s efforts to shift blame.

Democrats were no kinder. “You know what’s worse than high inflation and low unemployment?” Elizabeth Warren asked Powell. “High inflation and a recession with millions of people out of work, and I hope you’ll reconsider that before you drive the economy off a cliff.”

If the Fed follows through on expectations, 2022 will be remembered for the largest tightening impulse in four decades (figure above).

Frankly, these hearings are meaningless. I’d wager nobody on the Senate Banking Committee bothered to read the Fed’s semi-annual report, or at least not in its entirety. Inflation is the Fed’s problem officially, politicians’ problem actually and everyday people’s problem in reality. No Fed officials will lose their jobs due to high inflation, and while some politicians might, most of them are well-off and only care about inflation to the extent they can leverage it or be blamed for it. That leaves the public, and specifically the bottom 90% of the income distribution, holding the bag. Same as it ever was.

Statutorily, price stability is Powell’s responsibility. But since he’s unelected, the beleaguered public can only hold him to account vicariously, which in this case means voting against Democrats, a party to which Powell doesn’t belong. When the public does that in November, it’ll be a vote of no confidence in Joe Biden, but an uninformed one. Biden could’ve passed over Powell for Lael Brainard, but that wouldn’t have made any difference. The inflation die was cast by then, and even if it wasn’t, Brainard, a Democrat, is more dovish than Powell. If this is ultimately the fault of the president who appointed Powell, then it’s Donald Trump’s fault, but that doesn’t make much sense or much difference, because even if you wanted to argue that Trump’s de-globalization push and adversarial approach to Xi’s China helped set the stage for our current predicament, you can’t vote against Trump again until 2024, and when you can, that’ll presumably mean voting for Biden.

Additionally, both Trump and Biden handed out stimulus checks, extended benefits programs and showered money on the masses in an effort to protect households and bolster their poll numbers during the pandemic. While you could argue, as Steve Mnuchin did this week, that Biden’s stimulus was superfluous while Trump’s was necessary to avert economic oblivion, you’re reminded that Trump was still making Twitter videos in December of 2020 calling for stimulus checks even larger than the ones Biden handed out a few months later. The second round of stimulus checks weren’t trimmed to $600 because of Trump, they were trimmed to $600 in spite of him. Don’t let it be lost on you that the $1,400 figure included in Biden’s American Rescue Plan didn’t come out of thin air (even if the money did). It was the difference between Trump’s $2,000 idea and the $600 checks Congress approved before the Senate flipped to Democrats.

Where does Powell fit into any of this? Well, that’s a good question. Sometimes, I don’t know anymore, and I bet he doesn’t either on some days. He kept rates at zero and bought trillions in bonds as inflation continued to rise on the back of stimulus-fueled demand. That was gas on the fire if for no other reason than it juiced the wealth effect through soaring stock prices and home values. But as far as we know, Powell wasn’t involved in Vladimir Putin’s decision to invade Ukraine, and who’s to say stock prices and property values wouldn’t have risen anyway if the Fed had adopted a less aggressive approach? Countless twenty- and thirty-somethings would’ve still been stuck at home with nothing to do but trade stocks and crypto with the same stimulus checks and unemployment benefits. Demand for homes would’ve still outstripped supply by a country mile.

About the only thing we can say with something approaching certainty is that the Fed’s backstop for the corporate credit market was an enormous boon which couldn’t have been replicated by any other buyer. Ironically, the most emphatic testament to the strength of that backstop was that the Fed didn’t end up having to buy all that much in the way of corporate bonds. Their mere presence in the market was enough to spark a tsunami of inflows, which in turn left the primary market wide open for anyone who wanted to borrow.

On some days, I’m inclined to blame the Fed for being part of the inflation problem. On other days, though, it feels like they just refused to be part of the solution. Contrary to the old adage, not being part of the solution isn’t always synonymous with being part of the problem.

“A soft landing is our goal,” Powell said Wednesday, persevering amid persecution. “It’s going to be very challenging. It has been made significantly more challenging by the events of the last few months,” he added. “[I’m] thinking of the war and of commodities prices and further problems with supply chains.”