How The Federal Reserve Chair Got What He Wanted

Yesterday’s announcement by Jerome Powell of the Federal Reserve’s decision on interest rates was the Washington equivalent of a circus performer walking a “tightrope between inflation and bank turmoil”as the Wall Street Journal put it. Washington and the financial sector held their breath: one false step could have led to disaster. In the result, Powell got both the headline he wanted “Federal Reserve presses ahead with quarter-point rate rise despite banking turmoil” (Financial Times) and a stock market decline in the S&P500 by almost 2%.

As usual, there were two parts to the session. Powell began with a carefully prepared statement which portrayed the confident policy maker who had consulted the data and reached seemingly clear conclusions, albeit expressed in subtle shifts in phraseology from “ongoing increases in interest rates” to “policy firming.”

It was followed by a frank Q&A session, which Powell stressed that his statement was data-based, while admitting that there were many things on which the data provided no clear answer.

Powell talked about the issue of inflation as if he was a parent referring to recalcitrant child. Inflation, he repeatedly said was “surprisingly stubborn,” as he said repeatedly during the Q&A part of his news conference.

At the same time, he seemed to almost welcome the consequences of turmoil in the banking sector, which could slow lending and credit availability, but he was “uncertain by how much.”

The official projection now shows inflation slowing to 3.3% by the end of the year, down from 5.4% in the previous assessment. That’s progress, but still short, as Powell kept saying, of the target of 2%, which “will be achieved.”

Powell said the Fed welcomed scrutiny of its oversight of Silicon Valley Bank, which had collapsed earlier this month and has sent tremors through the financial system. An internal review had been ordered. In answering questions, Powell referred to “management failures”, but also to the fact that the Federal officials had been in continuing discussions with the top management at Silicon Valley Bank prior to the collapse, but that somehow, the issues had not gotten resolved.

Overall, Powell’s session conveyed:

· The Federal Reserve will continue to fight inflation and is hopeful that victory is not far off.

· The Federal Reserve will continue to support the banking system with appropriate measures.

· The Federal Reserve will continue to do its best to avoid “a recession” or “hard landing” for the economy.

· The Federal Reserve is not in a position to solve problems that may be caused by lack of fiscal discipline in Congress.

· The Federal Reserve will remain measured and data-based in its decision-making and will not do anything rash.

In effect, Powell effectively conveyed perhaps his most important message: the Federal Reserve is not the problem. The Federal Reserve is part of the solution.

And read also:

The Truth About Data-Based Decision Making By The Fed

Silicon Valley Bank Lacked Digital Age Management