Analysis of Powell's Jackson Hole Speech
Rabobank's Michael Every has provided a critique of Fed Chair Jerome Powell's recent Jackson Hole speech. Philip Marey, a Fed watcher, succinctly analysed the speech, pointing out Powell's attempt to hide behind other economists who had also been wrong in their initial diagnosis of inflation as "transitory". Marey criticizes Powell for this, stating that it is inappropriate for the world's leading central bank to resort to such a defence.
Powell's Premature Conclusion
According to Powell, the Fed has successfully brought down inflation while preserving labor market strength. However, this conclusion may be premature, given the rapid rise in the unemployment rate and the potential lagged effects of restrictive monetary policy. Powell's self-congratulatory tone was also criticized, with Marey arguing that the speech reflected hubris rather than humility.
Resisting the All-Pervasive Fed
Every draws a parallel between Powell's pivot to "do-everything-we-can" rate cuts and a political essay written by Czechoslovak dissident Havel in 1978. In his essay, Havel discusses how to resist an all-pervasive "post-totalitarian" system. Every suggests that Havel's critique could also be applied to the assumption that the all-pervasive Fed won't face resistance in the future.
Individual Incentives and Groupthink
While individual incentives for groupthink in markets are clear, Every argues that this does not mean the Fed's ideology isn't projecting an ideological 'reality' inconsistent with the facts. He points out that the Fed's claims about inflation and the labor market do not align with the current state of these economic indicators.
Living Within a Lie
Citing Havel, Every suggests that the post-totalitarian system has a tendency to disengage itself from reality and falsify everything, including the past, present, and future. Individuals may not believe these falsifications, but they must behave as though they do, or at least tolerate them in silence. By doing so, they confirm and fulfill the system.
Correctives and Dissent
In a free society and free markets, there are always certain correctives that prevent ideology from abandoning reality altogether. Every provides several points of dissent, including the potential impact of a weak August payroll number, China's deflation and mercantilism, rising commodity prices, and political problems arising from asset price inflation.
Risks and Downside
Every also highlights several potential risks and downsides, including the possibility of the German economy slipping into a crisis, the lack of a government in France, and the challenges facing the new UK Prime Minister. He also raises concerns about the potential impact of a Fed rate cut on exports if global growth slows.
Implications of a Fed Rate Cut
If the Fed has to cut again more than expected, things could get ugly. A recent Kansas City Fed paper explains that central banks and governments can coordinate on a 'safe debt' regime that insures bondholders or a 'risky debt' regime that insures taxpayers. However, if the global system sees another major crisis, the go-to answer of ZIRP and QE could create massive new problems.
Bottom Line
In conclusion, the key danger for markets is that while they want to hear about Fed rate cuts, the FOMC Chair may not be able to deliver what he and they want. This raises the question of whether Powell is truly "The Powell of the Powerless". What are your thoughts on this analysis? Feel free to share this article with your friends and discuss. Don't forget to sign up for the Daily Briefing, delivered every day at 6pm.
