William Poole, Former President of the Federal Reserve Bank of St. Louis and CCB Fellow, shares his outlook on Fed policy.March 9, 2022
I wish it were not so, and hate to criticize the institution that employed me for many years, most recently as President of the Federal Reserve Bank of St. Louis. That said, Chair Powell has led the Fed into a historic inflation disaster. The disaster has been unfolding, and much more is to come. I do not doubt the good intentions, but do doubt Chair Powell’s competence and, I must add, the competence of other members of the Federal Open Market Committee who have supported Fed policies since August 2020.
I take August 2020 as the kick-off date for a string of errors. At that time, the Fed changed its inflation target to a vague, “seeks to achieve inflation that averages 2 percent over time.” Stephen Pinker writes of self-discipline. “The technique is called Odyssean self-control, and it is more effective than the strenuous exertion of willpower, which is easily overmatched in the moment by temptation.” (Steven Pinker, Rationality, p. 55).
By the middle of 2021 it was clear that inflation was rising. The Fed has delayed, and delayed again, taking action to raise interest rates. Chair Powell apparently hoped that something would come along to reduce the rate of inflation without Fed action, or that the situation would become more clear, or that it would be OK to wait a bit longer. Of course the FOMC knew that it would eventually be appropriate to increase interest rates.
The errors extend to Chair Powell’s testimony a few days ago. He announced that the FOMC would most likely raise the Fed funds interest rate by 25 basis points at its meeting March 15-16. There was a lot of cautious verbiage around 25 basis points, but 25 is what the market heard.
Suppose it is clear, which is my expectation, that 25 basis points is not enough. What happens to the clarity of Fed policy if the CPI release for February on March 10 is a shocker on the high side, as was the employment release on March 4?
And, why is there so much emphasis on the clarity of Fed policy as it relates to financial markets and no such emphasis on the predictability of the inflation rate as it applies to both consumers and producers? In the past, before the Fed gutted its inflation target, there was reasonable certainty that the inflation rate would be in the neighborhood of 2% per year. Ask the average commuter about the anticipated price of gas a year from now. Ask the same question to oil-industry experts. Of course the Russian invasion of Ukraine has increased uncertainty, but so also has the generalized inflation the Fed has permitted to take hold.
Consider the uncertainty over wage rates. When I look at the latest release of the Employment Cost Index I see that union compensation has grown more slowly than non-union compensation. That tells me that strikes are in our future, including strikes of public employees such as teachers. The BLS will release the Employment Cost Index for December 2021 on March 18, a few days after the FOMC has acted. If that report comes in on the high side it will deepen market concern that the Fed has fallen behind. Only if it comes in substantially below current expectations will it allow the market to exhale in relief, at least temporarily.
If the FOMC does not act decisively, very soon, inflation expectations will become unstuck. “Unanchored” is the term economists use. When that happens, the FOMC’s task in regaining control will become much more difficult. I suggest that Chair Powell review experience in 1994. Chairman Greenspan acted decisively to choke off potential inflation. The final step in raising the fed funds target was an increase of 75 basis points.
Is it conceivable Chair Powell would raise the target that much in a single meeting? Over the past 18 months the real rate of interest has fallen by much more than that. Yet, as I write the FOMC has not raised the fed funds target by even one basis point. What happened to the Fed’s risk-management approach to policy? Wasn’t it clear in the middle of last year that there was at least a risk that inflation would continue? Why has there not been even a precautionary increase, which could have been reversed if necessary?
One of the problems in writing about any specific firm or organization is to distinguish person from policy. I have never met Chair Powell and never observed him from inside the Fed. That said, he is the leader and the person most responsible for Fed policy. I would not be fooling anyone if I wrote only about the Fed and left his name out of the discussion.
I do not doubt Chair Powell’s good intentions but do question his competence. He has put the nation on the road to inflation hell.
All opinions expressed by the author are their own. They do not reflect the opinions or views of the Global Interdependence Center or the College of Central Bankers unless expressly stated otherwise by the GIC or CCB.
The Global Interdependence Center is a neutral, nonpartisan nonprofit organization that convenes conferences and events around the globe to explore important topics related to the global economy. The College of Central Bankers, operating under the administrative umbrella of the GIC, is comprised of former leaders of the world’s central banks and its distinguished Advisory Board, all of whom are experts in their fields.