The Fed's Powell needs to answer these questions
(Bloomberg View) -- Given the chance to question the chair of the Federal Reserve, politicians and journalists often waste the opportunity. Too often they ask questions that are easy to sidestep. For example, central bankers love questions on productivity because they can say it is a good thing and that lawmakers ought to do something about it because it is not the central bank’s mandate, so they can't affect it very much. You may as well ask central bankers about their views on daylight saving time.
Nor can you ask central bankers what policy they will follow, because they will always reference published projections that rarely change, with a big "it depends" tacked on at the end of their answers.
The better questions are framed in terms of how policy will respond to different shocks. Those are the questions they are almost certainly asking themselves and their staffs at meetings, so those are the ones they should be prepared to answer. Plus, they are much more difficult to filibuster. There wouldn't be much point in asking at Wednesday’s Federal Open Market Committee press conference if tariffs are bad or if free trade is good. The answer is always something like: “Trade is a good thing and has contributed to growth dynamism. Trade wars are dangerous, but trade should also be carried out on a fair basis that benefits both sides.”
The question to ask is:
If trade barriers spark inflation, what will your policy response be? Will you respond to the first wave of price increases or wait to see if the inflation in traded goods is embedded in a second round of inflation and wages? In the first instance, are you more worried about employment or the inflationary effects of trade barriers?
It is much harder to evade those questions because they address areas for which central bankers are directly responsible. It will also be hard for them to answer the questions without conveying their views on whether the actions are desirable.
Similarly, don’t ask if the inflation target could be raised above 2 percent because they are likely to say the target is symmetric around 2 percent without explaining what that means. Instead, ask:
Are you strictly symmetric in targeting 2 percent with equal weight on misses on both sides? In other words, would you consider an overshoot of 2.3 percent as bad as an undershoot of 1.7 percent? If inflation was 1.8 percent this year would you rather it be 2.2 percent next year so it averages to 2 percent, or do you let bygones be bygones and keep aiming for 2 percent every year independent of the outcomes?
I suspect that is a question Fed Chairman Jerome Powell does not want to be asked. The true answer might be, "we are debating this internally and don’t have a consensus." The judicious answer might be to repeat the symmetric 2 percent target mantra. Such an explicit evasion to a precise question would itself be informative.
No Fed official will ever give an opinion on the level of the dollar, so it is useless to ask if it is too strong or too weak. The answer will be: “Treasury makes dollar policy.” Instead, ask:
Would further dollar weakness from current levels make it easier or harder to hit your inflation and employment target? If the dollar were to drop another 10 percent, would that affect the path of monetary policy?
Or, you might get a useful answer to:
Why do you think the dollar is so weak despite interest rate differentials that are moving in favor of the dollar? What other factors are at play? Is a weak dollar playing a role driving the sharp increase in manufacturing employment and production in recent months, or are other factors driving this improvement?
Forget about questions such as: Is fiscal stimulus helpful at this stage if the cycle? There is a pat answer that Congress makes fiscal policy and the Fed incorporates that in formulating monetary policy. If you are lucky, a central banker may say that fiscal stimulus close to full employment is risky.
Try asking this instead:
How much will fiscal stimulus add to GDP this year and next based on your best estimates? How would you assess the breakdown between added supply versus added demand? How much does this added fiscal pressure add to equilibrium interest rates in your view?
A couple of additional questions:
Your estimate of equilibrium unemployment always seems to track actual unemployment lower. Is there anything more to your estimation procedure than allowing the unemployment rate to drop a few tenths of a percentage point and seeing if there is any pickup in wages? What makes you think the equilibrium unemployment rate is in the low 4 percent range rather than 3.5 percent or 4.5 percent?
Is there a maximum pace at which the unemployment rate can drop before you really become worried about immediate overheating? Is it OK, for example, if the unemployment rate drops 0.4 percentage point per year, but not OK if it drops 1 percentage point?
Do you worry that monetary policy is becoming less effective because the economy is less capital intensive? The marginal job is in a gym or restaurant that requires much less investment per worker rather than an auto plant. Maybe business invests less because it needs less capital and that is why the rates effect may be dampened in both directions?
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Steven Englander is the head of research and strategy at Rafiki Capital. He was previously the head of G10 currency strategy at Citigroup and the chief U.S. currency strategist at Barclays.
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