By Jeanette Garretty, Chief Economist
June 16, 2020 – At a recent Stanford Institute for Economic Policy Research Associates Meeting, the distinguished Stanford economics professor and monetarist John Taylor described Fed Chairman Jerome Powell as “speaking his mind.” It is a characterization that comes up time-and-again, always as a compliment; the most powerful central banker in the world as a direct, plain-spoken leader fully engaged in a job that he well-understands touches the lives of so many in largely obtuse and confusing ways. Over the past few months, the Federal Reserve has taken extraordinary actions with incredible speed to ensure the functioning of global financial markets and to minimize structural damage to the US economy. Most of what the Federal Reserve has done, however, is behind the scenes to everyone but those deeply involved in the mechanics of the banking and investment communities. Throughout, Chairman Powell has attempted to bring a sense of order and calm during a deeply chaotic time, mostly by “speaking his mind.”
Alan Greenspan was probably speaking his mind as well during his famous Humphrey-Hawkins presentations on Capitol Hill (The Humphrey-Hawkins Act mandated a semi-annual report to Congress on the state of the economy and the positioning of monetary policy. Powell will do his own semi-annual report on June 16-17.) But what a mind! Such was the belief that Chairman Greenspan knew so much more than mere Wall Street mortals that countless hours were spent evaluating his speeches for the reasoning behind using the word “with” instead of the word “and.” Ben Bernanke came to his role as an acclaimed student of the Great Depression, a true academician with a scholar’s belief in presenting all sides of an argument as the often confusing road to clarity — and was therefore much loved by economists. Janet Yellen brought experience, practicality and toughness developed from her six years as President of the San Francisco Federal Reserve Bank. In general, she used that to communicate well with the investment and business community during a time of continual challenges following the financial crisis of 2008-2009.
Jay Powell, as he is almost universally known by friends and acquaintances, is not a trained economist or academician, as were his immediate predecessors. He is a lawyer and an investment banker. Yet, under Janet Yellen, he worked extremely closely and effectively with arguably the most qualified economist to hold the post of Chairman (Yellen). And while one would think that eight years at the Federal Reserve (he was first appointed for a term that began in 2012 and became Chairman in 2018), surrounded by research geeks and policy wonks would effectively diminish if not obliterate any ability to communicate clearly with both Main Street and Wall Street, he has adhered to Janet Yellen’s style of clear explication and considerable caution in action. More specifically, when it comes to the Federal Reserve’s dual mandate of preserving price stability and ensuring maximum employment, Powell, like Yellen, appears to be prepared to err on the side of ensuring the health of labor markets and the strength of employers. There is no better example of this focus than the extraordinary Federal Reserve program being launched this week called the Main Street Lending Program — a program to encourage banks to lend to small and medium-sized businesses in this time of great economic uncertainty (risk) by offering to buy these loans off of bank balance sheets.
On June 10, following a much anticipated two-day Federal Reserve meeting, Jay Powell could not have been more clear in stating his concerns about the US economy, despite the re-opening of states and the rebound in the stock market. “We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates,” he responded to a question of what the Federal Reserve would do if things continued to look better than expected. And while he acknowledged the good news of the 2.5 million jobs added by the US economy in May, calling it a “welcome surprise” he immediately commented that “ We hope we get many more like it, but I think we have to be honest, that it’s a long road.” So clear was Chairman Powell in his synthesis of the Fed’s deliberations that equity markets– after an initial positive response to a more typical Federal Reserve statement that “We are strongly committed to using our tools to do whatever we can and for as long as it takes to provide some relief and stability” – tumbled into negative territory. Even the White House seemed to understand the message, to its considerable irritation. The good news is that interest rates are near zero. And that’s also the bad news.
But perhaps the most remarkable part of Jay Powell’s statement after the Fed meetings was his comment about the millions of people who might not find their old jobs available when they seek to return to work:
“We’re doing a fair job of getting through these first few months, more than a fair job. The question, though, is that group of people who won’t be able to go back to work quickly—what about them? It could be some years before we get back to those people finding jobs.”
In late May, at a Princeton University online discussion, he gave additional voice to his concern that “the pandemic is falling on those least able to bear its burdens, it is a great increaser of inequality.” The Fed has been challenged before on the issue of what it can do to address the forces behind growing inequality in the US economy, most notably during Jay Powell’s first Humphrey-Hawkins testimony as Chairman, in 2018. It is an issue that will certainly come up again, with great likelihood this week. And there is probably no other Chairman of the Federal Reserve who will have ever so expressed his anguish over the limitations of his toolbox in this regard, now and in the future. This will be worth listening for in his Capitol Hill testimony on June 16 and 17.
Jerome “Jay” Powell spent his high school years and his law school years in the Jesuit educational system (in this regard, his undergraduate time at Princeton can be seen as a detour.) It is a system that instructs a life of compassion, conscience, competence and service to the community. Given the soul-wrenching events of the last few weeks and months, it may be for the best that it is Powell who is asked to speak clearly about what the Fed hopes to achieve — and is willing to do – to clear the path to recovery and renewal.
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