Federal Reserve Chairman Jerome Powell spoke during the Wall Street Journal’s Future of Everything Festival on Tuesday and continued to talk tough about fighting inflation, all the while spinning Keynesian economic myths.
In his podcast, Peter broke down Powell’s comments and talked about what he thinks the central bank will really end up doing.
Powell continues to operate on the pretense that it’s all hands on deck and that the Fed is ready to fight inflation with all the tools at its disposal.
That raises an interesting question that the WSJ interviewer actually brought up. Why doesn’t it appear that the Fed is treating inflation as an emergency? Why not just rip the bandaid off and push rates to 2 or 3% now. Powell didn’t really answer that question. But he did seem a little defensive.
“By the standards of central bank practices in recent years, we’ve moved about as fast as we have in several decades,” Powell said. “Monetary policy works through expectations,” he added. Powell also said that “financial conditions, overall, have tightened significantly.” He went on to reiterate the central bank’s commitment to the inflation fight. Peter said this was just word games.
“This was the Fed just talking tough, again, hoping that it can talk tough and not actually have to act tough.”
Powell was also asked why the Fed boxed itself in with a commitment to 50 basis point rate hikes. Powell backed off of that somewhat, saying the central bank will be data-dependant. In essence, he seemed to put 75 basis points back on the table. He also left himself some wiggle room to go less if the economy really tanks.
Peter said Powell has already shown his true colors. He’s afraid of how a drastic move will impact the markets.
“He’s not willing to do whatever it takes. It’s not “markets be damned, full speed ahead on the inflation fight.” Because if that was the case, rates would already be much higher.”
Of course, Powell brought up the strength of the economy.
“The underlying strength of the US economy is really good right now. The US economy is strong, the labor market is extremely strong. It is still at very healthy levels. Retail sales numbers, the economy is strong. Consumer balance sheets are healthy. Businesses are healthy. The banks are well-capitalized. This is a strong economy. We think it is well-positioned to withstand less accommodative monetary policy and tighter monetary policy. Of course, we do monitor global events, and global events have been important to our economy. The war in Ukraine is something that has upset the global commodity picture, while also threatening the global world more broadly.”
Powell also said it is the Fed’s job to slow the economy down and tamp down demand to slow rising prices.
Peter said the economy really isn’t strong. And it’s not about slowing down the economy.
“This is the Keynesian myth that inflation comes from economic growth. It doesn’t. … Economic growth brings prices down. It can offset the effects of inflation because a growing economy produces more stuff. So, you never want to slow down real economic growth, not if your goal is lower prices because real economic growth results in lower prices.”
When Powell says he wants to slow down economic growth, he really means he wants to slow down consumer spending.
“That is the problem. It’s because people are consuming and not producing. They’re spending without working. And where are they getting that money? They’re getting it from the government. They’re getting it from the Federal Reserve. But Powell can’t talk about slowing down the spending without acknowledging the source of the money. It’s coming from the government. It’s coming from credit. It’s coming from the Fed’s printing press. That’s what needs to be slowed down.”
Powell said the Fed would slow down its inflation fight when it sees clear and convincing evidence that inflation has turned down. Peter said Powell isn’t ever going to see that.
“I think what the Fed is going to see is clear and convincing evidence that the economy has slowed down — that it is either on the verge of recession or already in recession. And the Fed will then jump to the erroneous conclusion that that weakness in the economy is the evidence that inflation is going to come down. So, inflation is not going to actually come down, but the Fed will conclude based on the weakening of the economy that weakening inflation is going to follow, even though not only won’t inflation follow the economy down, the weakness in the economy is actually going to push inflation up based on what it’s going to do to the dollar and based on the impact it’s going to have on monetary and fiscal policy that will result in more, not less inflation.”
In this podcast, Peter also talked about retail sales, Jeff Bezos calling out Joe Biden, the fact that businesses are absorbing costs not gouging customers, and Bernanke’s take on bitcoin. Peter also warns to brace for an economic crash.