HOW POWELL THINKS (2/4/24)

He’s not a rock star, a politician, or a billionaire.

But each week thousands of people wonder what’s he’s thinking.

This past week he told us.

Scott Pelley from 60 Minutes interviewed Jay Powell.

(Season 56, Episode 18: 2/4/2024)

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Let’s dive in to see what his thoughts can teach us.

Below are my thoughts after reading the transcript.

(all quotes are taken from the transcript)

THE FED’S GOALS?

Maximum employment and price stability.

Jay thinks the economy is strong, and unemployment is in check.

Now it’s time to get inflation down to 2%.

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RATE CUTS

Jay’s best-case, middle-of-the-road scenario is 3 rate cuts.

If inflation doesn’t continue to go down, it may be less.

If unemployment rises, it may be more.

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INFLATION TARGET

Why 2%? Because that is the target advanced economy central banks over the last few decades have adopted, and because 2% leaves room to cut rates.

(Yes. I am thinking about the Pot Roast story here, and how questionable 2% sounds given climate change, housing prices, current wars, increased insurance, cybersecurity threats, and other grey rhinos.)

BUT FIRST …. COMMERCIAL REAL ESTATE (CRE)

“There will be certainly -- there will be some banks that have to be closed or merged out of, out of existence because of this. That'll be smaller banks, I suspect, for the most part. You know, these are losses. It's a secular change in the use of downtown real estate. And the result will be losses for the owners and for the lenders, but it should be manageable.”

NOTE: 1 TRILLION (and likely MORE!) will be lost in CRE.

I don’t doubt Jay’s honesty and preparedness here, but I just think things will be worse when something unexpected happens.

More research and posts to come on this topic throughout the year.

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SPEAKING OF UNEXPECTED…

Jay admitted to making at least two mistakes…

1) TRANSITORY INFLATION

"So in hindsight, it would've been better to have tightened policy earlier."

"And we thought that inflation would go away fairly quickly without an intervention by us."

"That it would be transitory. And that was very widely held. Not unanimously, very widely held view of economists around the world. And that the data were kind of friendly to that assessment, to that hypothesis, right up to the point when they weren't."

"And so in the fourth quarter of '21, it became clear that inflation was not transitory in the sense that I mentioned."

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2) SILICON VALLEY BANK

PELLEY: A follow-up, Mr. Chairman, to our banking line of question. You seem confident in the banks, and yet the Silicon Valley Bank, second largest failure in U.S. history. Did the Fed miss that?

POWELL: So, yes, we did. And I would say it this way. You know, that happened, and we forthrightly saw that we needed to do better. So, we've spent a lot of time working on ways to make supervision more effective and also to adapt regulation to a more, to a modern context in which a bank run can happen so much faster than it could have even 20 years ago. So, we have -- we accepted that right away. And, yes.

SPEAKING OF DATA….

How much data does Powell need to cut rates?

6 months is not enough. But perhaps 9 months is enough to discuss it.

Ultimately, Powell wants 12-months of data with the right trajectory.

Low unemployment gives him the luxury of more time to be cautious and exact.

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AND NOW ON WITH OTHER TOPICS…

CLIMATE CHANGE

Not mentioned in the interview. I wonder if it was just less important or if it was because of those pesky protesters who interrupted him last fall.

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CYBERSECURITY

“You have to fight that battle every day. It's never going to be over.”

“And the banks themselves invest enormous amounts of money in, in cyber protection.”

“And you've got to keep investing and staying caught up or getting ahead. That'll never stop.”

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HOUSING

The Fed’s goal is to decrease inflation. Lower rates lead to more inflation.

(I’m thinking…. the fact that lower rates increase affordability is not a consideration.)

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SPEAKING OF THINGS NOT BEING CONSIDERED…

Jay said the Federal Reserve is independent.

It’s not his place to comment on the below.

Election

Foreign Policy

Immigration

Fiscal Policy

National Debt

CONCLUSIONS: THREE “AHA MOMENTS”

“AHA!” MOMENT #1

Despite what some economists in the minority may have intuitively understood

regarding the “non-transitory” inflation from the mass government spending,

Jay waited for data to direct him.

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Jay Powell is data-driven. No data, no confirmation, no change in decision.

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In other words, Jay’s always going to be behind the ball.

He’ll make some mistakes as a result, but mostly small ones.

He’ll avoid larger mistakes from preemptive moves in the wrong direction.

“AHA!” MOMENT #2

There is no question that politics shapes the economy.

However, the Fed estimate cannot take this into consideration.

Instead, Powell adjusts his predictions after laws have been made, etc.

“AHA!” MOMENT #3?

The Fed funds rate affects the interest rate of U.S. Treasuries.

I’ve wondered at what level a Fed hike would be counterproductive

due to the subsequent interest created on the national debt and

the potential long-term inflation associated with the additional debt.

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Congressional spending remains unchecked,

yet the Fed estimate cannot take this into consideration.

The Fed’s mission is limited to low inflation and low unemployment.

Meanwhile, the national debt grows like wildfire.

The unsustainable deficit continues to grow faster than the economy each year.

FINAL WORDS?

Powell makes data-driven decisions that inherently have a lag.

Any shock to the system may not be fully addressed until it shows up in the data.

The projections of the Fed are based on the best-case scenario.

Fiscal policy, national debt, and politics are not factored into decisions.

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Given unexpected events and unknowns not considered,

the Fed’s estimate is likely to be less accurate over longer periods of time.

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The Federal Reserve is independent, but Powell likely believes Trump’s policies were harmful to the economy in areas of foreign policy and immigration.