Powell’s Jackson Hole speech came too early

At times, history has been made at Jackson Hole, as the world’s central bankers gaze at the snow-dusted Tetons, coffee cups in hand, to discuss the most pressing economic issues of the day. It’s where Alan Greenspan gave his famous speech explaining why monetary policy shouldn’t be used to prick stock market bubbles, and where, about a decade later, Ben Bernanke laid the groundwork for a fresh round of quantitative easing (QE).
More often than not, though, the retreat is a discourse of wonky ideas that never really make a dent in public conversation. It’s fair to say that Federal Reserve Chair Jerome Powell’s 2018 speech, his first in the role, fell into this latter category. It shouldn’t have. At the time, he argued policy makers shouldn’t feel compelled to hasten tightening just because conventional wisdom, anchored in past anxieties about runaway inflation, says they should. Powell extolled the virtues of risk management championed by Greenspan.
The genius of this message couldn’t be clearer today, and Powell would do well to repeat it. His speech this Friday, to be conducted virtually, comes as inflation is climbing and delta is raging. If the pace of rising prices is truly “transitory,” as the Fed asserts, the central bank should take its time before unveiling a gradual withdrawal from massive stimulus. With the delta variant slicing growth forecasts around the world and widening the divergence between advanced economies and emerging markets, a delay might even be prudent. Like it or not, the Fed is the world’s central banker.
The risks now are about doing something, as opposed to nothing. Just ask New Zealand, where a single Covid case put the entire country on lockdown, forcing the central bank to suspend what had been a widely anticipated interest-rate hike. The Reserve Bank of Australia is under pressure to reverse its recent QE tapering. Indonesia is extending debt monetisation, buying more bonds directly from the government. China has telegraphed another cut to the amount lenders must keep in reserve. If Beijing is getting nervous, the Fed needs to pay attention.
The issue for Powell in August 2018 was whether the Fed should stick with its gradual quarter-point increases in the benchmark rate every few months, or whether circumstances required more aggression. The economy looked to be on a tear: The jobless rate was below 4% and the Fed’s preferred measure of inflation had breached the 2% target. Powell was defending gradualism. What better way to do it than frame it as the hallowed Greenspan approach of the 1990s? He said:
“The committee converged on a risk-management strategy that can be distilled into a simple request: ‘Let’s wait one more meeting; if there are clearer signs of inflation, we will commence tightening.’ Meeting after meeting, the committee held off on rate increases while believing that signs of rising inflation would soon appear. And meeting after meeting, inflation gradually declined.” Yes, this was pre-Covid. But the idea of taking it slow has resonance today. The global rebound isn’t over, but its velocity has probably peaked. There’s little substantive difference between signaling — or even being explicit — that the time for taper is at hand when he speaks, and doing so after the September or November meetings of the policy-setting Federal Open Market Committee. That would still have the taper on course for a start in December or January, broadly the timeline many economists and investors have anticipated for months.

—Bloomberg