The Daily Update: Fed's Seat Of Their Pants

Federal Reserve Chair Jerome Powell yesterday gave the second round of his monetary policy testimony to the Senate Banking Committee. Unsurprisingly his comments were largely a repetition of Wednesday's session. Powell kept to script, and all was straightforward. Also, unsurprisingly, the Q&A session centred around Powell’s view on inflation and his thoughts about the current spike.

He did acknowledge that the Fed in some ways was flying by the seat of their pants. ‘We don't have an example of the last time we reopened a USD20tn economy with lots of fiscal and monetary support. This is a shock going through the system associated with reopening of the economy, and it has driven inflation well above 2%. And of course we're not comfortable with that’ he said, adding ‘The challenge we're confronting is how to react to this inflation, which is larger than we had expected - or that anybody had expected. And to the extent it is temporary, it would not be appropriate to react to it. But to the extent it gets longer and longer, we'll have to re-evaluate the risks’.

One person who does think the Federal Reserve is doing a good job navigating the world’s largest economy though pandemic is Janet Yellen, the Treasury Secretary. Yellen said that under the direction of Powell the Fed had ‘done a good job’. When asked about her view on inflation she said ‘I have a lot of respect for the Federal Reserve. And it’s important for them to make independent judgments about what’s appropriate’.

All a long way from Powell’s former bosses’ thoughts. Although Trump nominated Powell for the Federal Reserve Chair, he often publicly mocked him for what Trump thought was the less than stellar economic growth.

In 2019 Trump compared Powell and his impact on the economy to a ‘golfer who can’t putt’ whilst insisting that the central bank officials keep interest rates low. On social media (Trump is said to be suing Facebook, Twitter and Google over his social media bans) he claimed he was ‘doing great with China and other trade deals’, with the only fly in the ointment being Powell.

He who laughs last laughs longest!