Tuesday , May 24 2022
Home / S. Sumner: Money Illusion / A disappointing Powell press conference

A disappointing Powell press conference

Summary:
Stocks fell by about 2.5% during Powell’s press conference, perhaps because the answers were more hawkish than expected. A few observations:1. Powell was asked whether, in retrospect, the recent monetary and fiscal policy stance had been too expansionary. It seems clear that the answer is yes, but Powell indicated that we would have to wait 25 years for future historians to answer that question. This is nothing new; the Fed never blames itself for policy mistakes in real time.2. At one point Powell suggested that if real wages rise by more than productivity, the result could be higher inflation. In my view, the real problem is nominal wages rising by more than productivity—specifically by more than 2% above the rate of productivity growth. Not sure why he’s focused on

Topics:
Scott Sumner considers the following as important:

This could be interesting, too:

Shadi Hamid, Sharan Grewal writes Tunisia is sliding back into authoritarianism. Here’s what the US should do.

Douglas N. Harris, Feng Chen writes How has the pandemic affected high school graduation and college entry?

Alex Engler writes The Declaration for the Future of the Internet is for wavering democracies, not China and Russia

John Taylor writes Monetary Policy Got Behind the Curve, How to Get Back

Stocks fell by about 2.5% during Powell’s press conference, perhaps because the answers were more hawkish than expected. A few observations:

1. Powell was asked whether, in retrospect, the recent monetary and fiscal policy stance had been too expansionary. It seems clear that the answer is yes, but Powell indicated that we would have to wait 25 years for future historians to answer that question. This is nothing new; the Fed never blames itself for policy mistakes in real time.

2. At one point Powell suggested that if real wages rise by more than productivity, the result could be higher inflation. In my view, the real problem is nominal wages rising by more than productivity—specifically by more than 2% above the rate of productivity growth. Not sure why he’s focused on real wages, which have not been rising. Is his mistake based on some sort of Keynesian model? (Most of these fallacies seem to come out of Keynesian economics.)

3. The big decline in stocks occurred around the time of the first question, when Powell suggested that the balance sheet might be reduced, and also that the effect of balance sheet adjustments was much less important than the effect of interest rate changes. Lots of people believe the balance sheet is unimportant, and hence I was amused to see stocks fall sharply in response to Powell comments about something that is supposedly unimportant.

4. The second downshift in stocks occurred around 3pm, when Powell issued several comments that suggested he is worried about economic overheating (as he should be.)

5. Powell indicated that he now expects even higher inflation in 2022 than what he expected in December. The Fed is still behind the curve, indeed even further behind than in December. Monetary policy is getting even further off course.

PS. Over at Econlog, I discuss Powell’s strange response to a question on FAIT, where he seems to abandon the policy.


Tags:

 
 
 
Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

Leave a Reply

Your email address will not be published. Required fields are marked *