Powell Reading Volker

Macro Perspectives: Wed 18 Aug 2021

Jay Powell spoke in a virtual Town Hall meeting yesterday.

Given that the Fed has had a change of tune over recent weeks on the monetary policy outlook, it's a good idea to pay attention when the Fed Chair speaks.

Clearly the Fed has made an intentional pivot since its July FOMC meeting, in an attempt to set the stage for 1) a wind down of QE, and 2) to move forward expectations on raising interest rates. Of course, this intentional pivot comes as the Fed is confronted with undeniably hot inflation, with trillions of dollars of additional fiscal stimulus about to rain down.

So what did Powell have to say?

First, he said, very explicitly, that the Fed is in the process of "putting away its tools designed for actual emergencies." This confirms the recent chatter from Fed officials, that they will begin dialing down asset purchases in the next couple of months.

Maybe the most interesting thing said, when asked what book he recommends, Powell went into a long admiring discussion on Paul Volcker. He recommended his book, "Keeping At It." He called Volcker "the most distinguished public servant, in economics, in my lifetime."

So, as Bernanke was known to be a student of The Great Depression (and happened to be the right guy at the right time to navigate us through what could have been a Great Depression 2.0), Powell seems to have spent a lot of time studying what he calls "The Great Inflation" period. Like Bernanke, perhaps he may be the right guy, at the right time.

Volcker was, of course, confronted with double-digit inflation in the early 80s (as high as 14%), and he combatted it with an aggressive campaign of interest rate hikes. He took short term rates to as high as 19%. As Powell said, he took a lot of bashing, he was very unpopular. But in the words of Powell, "he did what was best for the country," over the medium and long-term. He beat inflation. And it led to, what Powell described as, "a long and very good period for the development of the U.S. economy."

For the first time in forty years, we have the very real threat of double-digit inflation. Will Powell respond as aggressively as Volcker responded? He seems to be prepared.