Can Powell Raise Rates With the Arch of an Eyebrow?
(Bloomberg Opinion) -- Accelerate on the way down. Going uphill? Skip the elevator and try the stairs.
That could well describe the changing approach to monetary policy over the past year. Most central banks couldn’t move fast enough to ease in the throes of the pandemic. There was a global economy to save. So what if they overshot? The worst that could happen was overheating, an acceptable risk given the alternative. Now many officials are averse to doing much at all, and certainly nothing dramatic. Growth is returning — with a vengeance in some places — and inflation is getting up off the floor. Going slow is virtuous.
Many policy makers have stressed their belief in the transient nature of the current inflationary uptick. Their confidence rests on a couple of assumptions: It's a catch-up from the depressed environment of last year and, if they’re wrong, clamping down is relatively easy. Good old- fashioned interest-rate hikes should do the trick, albeit at the risk of engineering too pronounced a slowdown.
Armed with such assurances, and carrying more than a few scars from inflation’s failure to fire over the past decade, central banks have come to regard forecasts with skepticism. They don’t just want to project a pickup in prices, they want to see it: “Outcomes” has become a buzzword. Such evidence is all the more important given the mixed signals amid the Covid recovery. You can have a very disappointing U.S. employment report, for example, followed by data showing inflation easily exceeded expectations in the same month.
Here’s where two of the most articulate policy makers today, Federal Reserve Governor Lael Brainard and Reserve Bank of Australia Governor Philip Lowe, are worth listening to — the former because she is an intellectual leader of the dovish camp at the Fed and often tipped for higher office, the latter thanks to Australia’s perceived success record. In a May 11 speech, Brainard said “the path of reopening and recovery — like the shutdown — is likely to be uneven and difficult to predict, so basing policy on outcomes rather than the outlook will serve us well.” At the RBA, which presided over three decades of expansion before the pandemic, Lowe has been talking about actual economic performance, rather than models, since the economy began looking up late last year. “We will now be putting a greater weight on actual, not forecast, inflation in our decision making,” he said in an October speech, a theme he has returned to often.
Central banks produce reams of forecasts and forward guidance, not to mention the famous dots that indicate where members of the Federal Open Market Committee see rates in years to come. If officials want us to take this paraphernalia with a dose of salt, perhaps they shouldn’t put them out there in the first place. Calling into question the relevance of this information will only undermine its future usefulness.
It's enough to make one nostalgic for the era of Alan Greenspan, who led the Fed from 1987 to 2006, when information published by central banks was scant relative to today. Chair Jerome Powell paid something of an homage to the former Fed chief in his first address in the role to the Jackson Hole retreat in 2018. The speech only reaffirmed Powell’s reputation as a dot-plot skeptic. It also suggested he saw merit in the simpler days when policy could swing on a leader’s feel for a situation.
Powell described how Greenspan resisted pressure to raise rates in the late 1990s in response to low unemployment and the accompanying idea that breakout inflation was around the corner. Greenspan had a hunch that old models were off the mark and the economy could grow at a faster pace without overheating. The Fed hiked the benchmark rate just once from mid-1996 through late 1998. Powell was clearly impressed:
“Under Chairman Greenspan's leadership, the Committee converged on a risk management strategy that can be distilled into a simple request: Let's wait one more meeting; if there are clearer signs of inflation, we will commence tightening. Meeting after meeting, the Committee held off on rate increases while believing that signs of rising inflation would soon appear. And meeting after meeting, inflation gradually declined.”
The Fed still took forecasts seriously then, but they weren't part of everyday central bank-speak. Public remarks weren’t as numerous and televised press conferences by Fed bosses after FOMC meetings didn’t start until 2011. That all sounds like prehistory, but it may well be a guide into the future.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
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