This week, as investors and economists fixate on record highs set by major stock market indices, they have ignored much more significant developments that emerged from the Federal Reserve's annual meeting in Jackson Hole, Wyoming. Fed Chairman Jerome Powell delivered a speech that somehow was almost universally interpreted as a reiteration of his commitment to continue to raise rates throughout the next few years. "Steady as she goes" was the takeaway from just about any news outlet. But the Chairman's actual message was essentially the opposite of what the media reported. From my perspective, it provided evidence that President Trump has succeeded in getting Powell's mind right on the need for the Fed to continue to stimulate the economy, no matter how much evidence emerges that it is already over-stimulated.
Many reporters, undoubtedly eager to write a story that would cast Trump in a bad light, characterized Powell's speech as a courageous defiance to the President's increasingly strident calls for the central bank to end its tightening campaign. Some stories even jumped onto the current "people turning on Trump" narrative to showcase Trump's foolishness in having appointed someone who would so easily turn on him. I'm not sure what speech they were hearing.
Despite the fact that inflation has moved above the Fed's target 2% threshold (U.S. Dept. of Labor, Bureau of Labor Statistics News Release, 8/10/18), Powell repeatedly suggested that it isn't likely to remain there, and as a result, the Fed would be unwise to lean into a tightening policy as if it were. Instead, he argued that the Fed should pursue a "wait and see" attitude as long as possible, and should only move when the data is unmistakable. When the Fed does act, he suggested that bold and decisive moves would make up for prior restraint. Call this the "whites of their eyes" monetary policy: fire should be held until the last possible minute, and when the order to fire is given the intensity should be massive. (Someone should point out to Powell that we lost the Battle of Bunker Hill).
Powell peppered his speech with many cautionary tales of how the Fed erred in the past by fighting inflation that was never really that dangerous in the first place, and he praised former Fed Chair Alan Greenspan for not raising rates in the face of traditional inflation warnings. By focusing on the phantom menace of inflation, Powell suggested that the Fed cut off prior expansions prematurely. Instead, he advocated for a new doctrine that places less emphasis on prevention and more on reaction. In other words, why bother with an ounce of prevention when a pound of cure will do the trick.