Feds Ghosts of Inflation Past
A succession of senior Fed officials have now tried to damp down expectations for steep rate cuts early in the new year, summarized here by Blooomberg colleague Catarina Saraiva.
That has not reined in excitement.
The debate over Powell’s pivot is like Ebenezer Scrooge facing the spirits on Christmas Eve, and centers on spectres from the central bank’s past, with a strong element of undigested denialism.
The discussion has focused on the 1970s, when US inflation slipped out of control in a way that hasn’t happened before or since.
Is it just possible that the risks of leaving rates too high for too long and taking the blame for an avoidable recession now bulk larger?
Just how much is next year’s presidential election, and the growing possibility that it will return Donald Trump to power, affecting the Fed’s stance?
It’s undeniable that much of the political establishment hates the notion of a second Trump term (which is a big part of his popularity).
The speech Powell made at Jackson Hole during the worst of the pandemic. Afterward, he was dubbed the “Anti-Volcker.” The Fed’s new monetary framework, he made clear, was designed to avoid overtightening and to build the chance of growth.
Rather than an explicit inflation target of 2%, the Fed announced, there would now be an Average Inflation Target (AIT) of 2%. That meant that inflation could be allowed to stay above 2% for a while, to keep it at such a long-term average.
Powell is approaching his 71st birthday, and it’s doubtful whether he wants a third term in one of the world’s most stressful jobs, so it’s not clear that he’s that susceptible to political pressure.
John Authers Bloomberg 19 december 2023
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