Jerome Powell’s Pillow Talk

Known to some as a one-man shadow open market committee Lawrence Summers wants a 0.25 percentage point interest-rate hike. The director of economic policy studies at the American Enterprise Institute, Michael Strain, wants a 0.50 percentage point increase. The Cato Institute’s Alan Reynolds suggests a 1 percentage point cut. The Twitter and Tesla entrepreneur, Elon Musk, is pushing a 0.50 percentage point cut, and money manager Bill Ackman is proposing a “pause,” in which the Federal Reserve neither raises nor cuts rates but rather waits until the next meeting, when there’s more information on what is happening with inflation and the regional banks. The person it’s really up to, though, is the Federal Reserve chairman, Jerome Powell. What is going on inside his head is what everyone on Wall Street is wondering ahead of Wednesday’s rate-setting meeting.It’s tempting to look at this as strictly a technocratic decision. That positions Mr. Powell and his voting colleagues on the Open Market Committee as a kind of supercomputer, gobbling up economic data about asset prices, employment, expectations, and confidence and digesting it algorithmically, and then spitting out an interest-rate decision that will best meet the Federal Reserve’s dual mandate of maximum employment and stable prices.That, though, ignores the human element. As Mr. Powell puts his head on his pillow tonight, he’ll have more than just numbers on his mind. Mr. Powell’s three immediate predecessors, Janet Yellen, Ben Bernanke, and Alan Greenspan, all had doctorates in economics. Mr. Powell’s advanced diploma is a law degree from Georgetown. Perhaps Mr. Powell wonders how his reputation will line up against theirs — or against that of Paul Volcker, who is remembered as a hero for defeating inflation with sky-high interest rates but who also contributed to a crushing recession in the early 1980s.Mr. Powell’s career at the Carlyle Group, a private equity firm, means that he benefited from, and is acutely aware of, the way that low interest rates and endowment-fund and pension-fund-manager incentives spurred the rise in the “Yale model,” in which real estate, venture capital, and private equity asset allocations surged and U.S. stock allocations shrank. A shrewd recent analysis by Bloomberg’s Guarav Pantakar suggests that the post-Silicon Valley Bank focus on liquidity and transparency may upend that and accelerate the end of the Yale model.The most important factor weighing on Mr. Powell, though, is probably less personal, and more institutional. Think of the Federal Reserve chairman as like Chief Justice Roberts — less concerned with the precise outcome or even the legal fine points, and more worried about avoiding 5-to-4 splits, so that the court does not appear partisan and retains its respect among the public and institutional independence. Warren Buffett, in the business context, has talked about “the institutional imperative” that can sometimes interfere with rational, profit-oriented decision making.In a strange way, the key to Mr. Powell’s thinking may be less in economics and more in political science, the discipline in which he earned his undergraduate degree from Princeton. The political scientist James Q. Wilson wrote in his 1978 book “The Investigators,” a study of the FBI, that, “In my view, it is the desire for autonomy, and not for large budgets, new powers, or additional employees, that is the dominant motive of public executives.”What did Wilson mean by “autonomy”? He explained, “An agency is autonomous to the degree it can act independently of some or all of the groups that have the authority to constrain it.” Autonomy comes “by acquiring sufficient good will and prestige as to make attacks on oneself or one’s agency costly for one’s critics.”Of critics, Mr. Powell has no shortage. Senator Warren is scathing: “A culture of corruption has taken root at the Fed under your leadership, and it appears now that the Fed’s ability to effectively carry out its crucial supervisory and oversight responsibilities — and manage risks to our financial stability — may have been hampered by a dangerous combination of deregulation and egregious ethics failures,” Ms. Warren wrote in a 10-page letter to Mr. Powell. The senator complained of what she said was Mr. Powell’s “determination to hike interest rates until the Fed throws at least 2 million people out of their jobs — and likely sends the economy into a full-blown recession.” President Trump, in 2019, characterized Mr. Powell and the other members of the Fed Open Market Committee as “Boneheads.”Without the Fed, the politicians might have to take responsibility themselves — or might be more directly accountable to the voters, in the way the Constitution designed it — for inflation and unemployment. Paradoxically, the Fed’s function for politicians as a scapegoat for anything wrong with the economy may be key to its survival.

Jerome Powell’s Pillow Talk

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