by Macro D
Jerome Powell is a seventy-two-year-old man who has had a brilliant career. Wherever he has gone, he has consistently demonstrated a first-rate education, and his theoretical approach has never posed any problems in terms of practicality, enabling him to excel in any role at the highest level. Can it be said that this "state of affairs" disappeared when Powell was appointed head of the Fed? On balance, I don't think so. Powell continued to be Powell even within the halls of the Eccles Building. In short, now that his mandate is coming to an end, Powell has done well, from my humble perspective. But on what basis do I say that Powell has done well? 1) The dollar is still the reference currency for the entire world; 2) the Federal Reserve is still the most important central bank on the planet.
That said, we can all agree that the work environment (good or bad) contributes exponentially to the quality of work performed by professionals operating in a given context. Now, I challenge anyone in American history to find a Federal Reserve chairman who found himself carrying out his role alongside a President of the United States with the same characteristics as the current president. All things considered, it seems to me that Powell was blessed (in the first and last phases of his term) with "the most complicated President" the United States of America has ever known. It's one thing to sit at your desk while love letters fly around you; it's quite another to sit while enemy anti-aircraft guns (which theoretically should be your friend) fly around you.
September 16th and 17th were not easy days for the Federal Reserve chairman. Once he found himself facing Stephen Miran in the antechamber of the meeting room, he probably thought, "Look what I have to put up with, at my age." The young aspiring governor quickly showed what he was made of (a quality that matches that of the person who sent him to that table). He immediately put himself in a difficult position, clearly stating that he would have acted differently (Miran wanted an immediate 50 basis point cut and immediately voted against the committee's decision).
But how did Powell approach September 16-17? A little voice reminded me to consider the other side of the coin, which urged Powell not to lift a finger (and not to lower rates). What was that little voice saying? "Is it really so important to cut rates right now? Is it the right choice to make?" After all, August inflation rose to 2.9% annually, from 2.7% the previous month! Are we all crazy? It would be like stepping on the accelerator right in front of a police checkpoint!. Faced with this little voice, I imagined Powell would hesitate like this: "Actually, on closer inspection, the American economy isn't showing any glaring signs of weakness, and the labour market numbers themselves aren't terrible: unemployment is at 4.3% (August), hard to call alarming given the high turnover that still characterises the United States. I don't see any pressing need to stimulate it."
On the other hand, a more robust voice, worthy of a Luciano Pavarotti in a state of grace, shouted, "Watch out for unemployment! It's rising sharply!"
And at this point, Powell's heartbeat increased "But if American inflation gains momentum, also due to price increases caused by Trump's tariffs, the risk is that the central bank and I will be late to the point where the battle must be fought. It already happened in 2022! If that were to happen, rates would then have to rise much more than they are now!
Last week, we saw how it ended. It's too early to pass judgment. Now, I'd like to focus on the future, drawing on what the past (and its protagonists) tells me. I'd really like to understand why the Federal Reserve (and its governor) feel like the custodians of a divine mission. Yes, if Powell hadn't felt the weight of a responsibility greater than it actually is, he wouldn't have lowered rates. In short, I believe that Powell decided to implement the rate cut because, like his predecessors, he too has given in to the call of a "mystical inspiration" capable of bringing even the purest rationality to its knees. Powell succumbed, not to Trump, but to the secular vision of a Fed called upon to save the world.
So, the question is "Why does the Federal Reserve think it needs to save the world?" When did all this begin? One name stands out: Alan Greenspan. It was with him that the Fed started to take on the task of supporting financial markets at every opportunity, instilling in all of us the idea that, rain or wind, snow or hail, the Fed sees and hears everything and then finds the right solution. After Greenspan, all central bankers took on this task, especially Bernanke and Yellen. Powell, albeit to a lesser extent, followed the same path. Still, the lack of presumption inherent in Bernanke and Yellen allowed him to guide the market without the daily attitude of a banker who feels invested with a divine mission. The result is that while Bernanke and Yellen staged the play in a theatre where speculative bubbles easily form, Powell has staged a play where bubbles are easily forced to delay their emergence. Even if the result is the same, Powell's intimate honesty has forced the markets to calm down. Yet, this time too, the fire is smouldering and promises to erupt (sooner or later) into very high flames. With another central banker, the bubble would probably have burst already; with Powell, however, the bursting of the bubble has been delayed. I look around: prices are skyrocketing; for example, Big Tech has stratospheric valuations, as do artificial intelligence companies, and the investments made in this sector are destined to be far greater than the economic returns that will be achieved in the future. Therefore, in response to the question that prompts this piece, what can be said?
My natural prudence suggests that there were significant reasons to reduce US interest rates, and I assume the decision was made to do (for the umpteenth time) what the markets were demanding. Where will this compliance lead? That said, I realise: Powell couldn't have done otherwise; he kept the ship in port as long as he could; he couldn't wait any longer. Now all that remains is to hope that the sea awaiting that ship isn't too rough and harsh, because if that were the case, then things could get ugly. The captain is about to be replaced, and the new one (probably Miran) doesn't seem inclined to listen to weather forecasts or explore the ocean floor, as he believes (along with his new employer) that there's only one thing to do: cut rates indefinitely. Full speed ahead!