The Powell Problem

We like the point our columnist Lawrence Kudlow makes about the Federal Reserve chairman’s confounded loquacity. It seems as if every time Chairman Powell speaks, the markets break out with the fantods. This problem isn’t confined to Mr. Powell alone. It is a feature of the age of fiat money, meaning money that is not defined in terms of gold or other specie. It makes one pine for the famed aphorism, “Silence is golden.”We started making this point in 2011, when the Fed’s chairman at the time, Ben Bernanke, had the brainstorm of holding a quarterly press conference. “The scariest moment of the next quarter,” we called it, amid reports that the commentary from Mr. Bernanke was likely to prompt “a giant ramp up in volatility.” In light of how closely markets watch the Fed’s cryptic pronouncements, we noted, it would be a disaster to meet regularly with the press.“Traders react to one word removed from a paragraph in the policy statement and now he’s going to hold a press conference?” market analyst Jon Najarian fretted. He was prescient. In March, the Center for Economic Policy Research noted that the six most recent Fed pressers had sparked market swings of more than 1 percent in the S&P 500 and that Mr. Powell’s press conferences had induced three times more volatility than his predecessors’.It struck us that there was ample justification for the “tradition of silence among central banks.” As far back as 1929, the Bank of England’s deputy governor, Sir Ernest Harvey, was probed by John Maynard Keynes to say more about the bank’s policy. The banker refrained, so as to “leave our actions to explain our policy.” When the economist persisted, Sir Ernest replied that “To defend ourselves is somewhat akin to a lady starting to defend her virtue.”We were reminded of that exchange by the editor of Grant’s Interest Rate Observer, James Grant, who in 2011 was himself skeptical of Mr. Bernanke’s plans. He wondered whether the future Nobel laureate was “reacting to the smoldering populist rage over the inflation he refuses to acknowledge.” He contrasted Mr. Bernanke’s impulse to rhapsodize to the press with the close-lipped strategy of the Bank of England in its heyday.The Old Lady of Threadneedle Street, during “its glory days managing the pre-World War I gold standard,” Mr. Grant noted, was known for saying “next to nothing.” Yet the English central bank did “conscientiously exchange bank notes for gold, and gold for bank notes, at the statutory rate.” The bank’s work, carried on in silence, kept up the gold standard, laying the foundation for more than a century of global trade expansion and growth. Mr. Grant contrasted the taciturn Bank of England with today’s Fed, “which prints acres of money, manipulates stock prices, suppresses interest rates — and can’t seem to stop talking.” Hence Mr. Kudlow’s appraisal of Mr. Powell: “The more he talks, the less sense it makes. He’s a single-handed volatility producer.” It leads our columnist to “yearn for the days when Paul Volcker would blow cigar smoke at Congress and basically tell people nothing.”Yet Mr. Powell, like Mr. Bernanke, seems to relish the klieg lights of the press’ cameras, with unfortunate consequences. “At one point, he said we don’t see inflation coming down to 2 percent until 2025,” Mr. Kudlow laments. “And the market sold off 200 points. Then, he said something else — and the market came back. Who knows?” How to cut through the distracting blather? Mr. Kudlow suggests keeping an eye on gold. The monetary metal, Mr. Kudlow says, “is a classic inflation indicator, telling you whether the dollar is fundamentally strong or weak.” The fact that the dollar has sunk to barely more than a 2,000th of an ounce of gold, he says, could be “why the Fed keeps raising its target rate. It’s not a great sign for future inflation.” It’s a reminder that the dollar’s gold value has more to tell us than any pronouncements by the Federal Reserve chairman.

The Powell Problem

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