The Fed Just Made Its Most Hawkish Turn in 30+ Years (Did Anyone Notice?)
I realize it’s getting late to discuss the June 12–13 FOMC meeting, but I think the Fed’s biggest news from that meeting may have slipped under the radar.
To confirm the relevance of what I thought I heard during the post-meeting press conference, I spent some time last week reviewing old speeches, transcripts and other materials produced by Fed officials. I’m now convinced that Chairman Jerome Powelldelivered an important message that went largely unreported, and I expect him to keep at it until people take notice.
Powell’s message is that he intends to pop bubbles—both asset-price and credit bubbles. He didn’t communicate a precise threshold for bubble popping, but I believe he meant not just big bubbles but potentially little bubbles and possibly even pre-bubbles if that becomes necessary to contain the risks of financial instability. If we take him at his word, we should expect him to respond much more aggressively than his predecessors did to financial excesses, and those aggressive responses will occur even without an inflation threat. In other words, policy adjustments designed to maintain financial stability could disconnect from the FOMC’s inflation target.
One of These Fed Chiefs Is Not Like the Others
Before I present my case, let’s recap the status quo that Powell appears to have toppled—namely, the hands-off approach of his three most immediate predecessors:
With those points in mind, we’ll take a close look at the June 13 press conference, which was the second Powell hosted as chairperson. In fifty-two minutes of soft-spoken dialogue with the mainstream media, Powell tossed aside the Greenspan–Bernanke–Yellen playbook five times. As you’ll see, the five instances were somewhat repetitive, but I’ll excerpt each one to show how calculated the new message appears to be. I’ll also italicize the key words, starting with an excerpt from his opening statement:
The language in this sentence might seem ordinary if read quickly, but comparisons to what we would have heard from Yellen show it was a clear departure. Consider the following observations from my review of Yellen’s press conferences as FOMC chair, beginning with her first in March 2014 and ending in December 2017:
So Powell’s opening statement wasn’t just boilerplate language. Those three words—or financial excesses—never appeared in the same context in any of Yellen’s sixteen press conferences, let alone in the opening statement.
But that was just the beginning. Here’s the next excerpt, this one in response to a question about wage growth:
Holy triple mandate, Batman, I count three goals in that sentence. Needless to say, Yellen never defined the Fed’s role in the same way. She never elevated financial stability to a position alongside the traditional goals of full employment and stable prices. And take note, Powell was answering a question about wage growth—there was no prompting whatsoever.
The next questioner asked about inflation overshooting the Fed’s target. Here’s the relevant excerpt from Powell’s response:
Once again, Powell cited financial risks as a potential trigger for monetary tightening. And once again, his phrasing (namely, the conjunction “or”) suggested he could raise rates quickly even without an inflation threat. Whereas Yellen never once listed both inflation and financial instability as threats that could require aggressive tightening, Powell can’t seem to describe it any other way. To state the obvious, his two tightening criteria are two times as many as the single tightening criterion (inflation) used by Yellen and her two predecessors—a neat math fact that explains why I called this the most hawkish turn of the past thirty-plus years.
Later in the press conference, a questioner asked about the neutral interest rate but included an add-on question about the inflation rate. Powell concluded his answer like this:
I enjoyed that he prefaced his conclusion with “It’s worth noting.” He seemed to be saying, “Look folks, you can ask about inflation all you like, and I’ll say all the right things. That’s what central bankers do. But we’re in the twenty-first century—financial instability is the new inflation, and you might like to adjust your focus accordingly. By the way, I’ve already adjusted mine, aren’t you listening?”
Powell then fielded a question about President Trump’s trade war and began his answer like this:
With apologies to the youngsters, cue Chandler Bing asking, “Can he be any more subtly and smoothly obvious?” This fifth and last excerpt confirms that Powell’s a triple-mandate guy, referring to the Congressional mandates that everyone else describes as only full employment and stable prices, with financial stability being a separate though related issue. But Powell consistently blends the three together, which you would only do if you feel strongly that financial excesses are a monetary policy matter. In other words, the bits and pieces excerpted above all point to the same conclusion—he plans to react to financial excesses more hawkishly than Greenspan, Bernanke or Yellen did, and he’d like us to get used to the new approach.
Don’t Forget Who You’re Listening To…
Powell’s language strayed not only from his predecessors but also from his own prior comments—he spoke differently at his first FOMC press conference on March 21 than at the June press conference. In the earlier presser, he didn’t deliver any warnings similar to those excerpted above.
I can only guess at the reasons for waiting until June to make his move. He may have waited because stock prices were falling, or he may have decided to act as Yellen-like as possible while people get comfortable with him, or there may have been another reason altogether. Of course, new leaders often stress continuity when they assume power, since they can always sneak in the discontinuities later.
In any case, unless I missed an interview or an op-ed or a message in a bottle somewhere along the way, the June press conference offered the best look yet at Powell’s thinking. It also reinforced a speech he delivered on May 25, which hinted at a new approach but not as clearly as in the following month. And then in his latest speech on June 20, he continued to connect monetary policy with financial stability, once again while claiming a triple mandate and stressing that financial excesses have bossed the third-millennium economy.
As I see it, the progression from March to May to June only adds to the sense that there’s a process of carefully altering the Fed’s message with regard to financial stability policies. Remember, the Fed prides itself on the power and precision of its communications—it even claims forward guidance as a policy tool. If you spend any time listening to speeches by FOMC members, you learn that your behavior and that of every other American is being manipulated by the three or four pages of each six-weekly statement and the fifty or sixty minutes of each quarterly press conference. Or at least that’s the theory. So it seems unlikely that Powell would change the usual language, significantly and repeatedly, by accident.
Summary and Conclusions
To recap, Greenspan flatly rejected the notion that financial excesses should be a monetary policy matter, and he was backed by Bernanke, wholeheartedly, and then by Yellen, who ever so slightly qualified but made no effort to reverse his approach. But according to Powell’s message on June 13, the more than thirty-year period of monetary policy makers insisting they’re not the right people to contain financial excesses is now over.
The new Fed chief said that financial excesses are not only a monetary policy matter but one that’s first equal with employment and inflation. By implication and according to the warnings excerpted above, the FOMC could tighten policy in response to financial excesses even if inflation is well-behaved.
Essentially, Powell announced he’s not afraid to pop bubbles, meaning both asset-price and credit bubbles. Depending on how far he decides to take it, he could even act to prevent bubbles before they inflate. Setting aside the trickier question of whether he’ll be successful at something the Fed hasn’t attempted in many years, he certainly gave us plenty to think about.
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