Powell’s Homage to Greenspan Hints at a Fed Flashback

(Bloomberg Opinion) -- It’s been a long time since Alan Greenspan gave the big speech at Jackson Hole.

And yet there he was, almost ubiquitous, in the ideas and words of Federal Reserve Chairman Jerome Powell’s speech at the central bank’s retreat in Wyoming. Powell heaped praise on Greenspan’s insight as chairman in the 1990s, perceiving that something that changed in the economy and that the old links between strong growth, a vibrant labor market and inflation had broken down. Rates didn’t have to increase as much as conventional wisdom at the time held that they should.

Greenspan was revered during his tenure atop the Fed and is still held in esteem for his macro insights. Less so for his regulatory views, which were criticized in the wake of the global financial crisis for being too lax. No matter, it was his judgment about the economic trajectory in the 1990s that Powell revisited and sought to channel.

The new chairman enlisted that message as a preface to defense of the Fed’s gradual approach to lifting borrowing costs. Sure, unemployment is 3.9 percent and gross domestic product surged 4.1 percent in the second quarter. That doesn’t mean the Fed needs to accelerate the pace of rate increases, which has been a quarter-point nudge in the federal funds rate every quarter since late 2016. After all, inflation is relatively low and only recently hit the Fed’s target of 2 percent.

Powell is trying to bridge two modern schools of thought. One is that when faced with uncertainty about whether low unemployment will eventually spur faster inflation, it’s best to do nothing or very little. The other would be some kind of precautionary approach, just in case inflation is lurking right around the corner. The question for either school: Just where is the neutral rate of interest now, one that neither stimulates nor constrains the economy?

Powell said in Jackson Hole on Friday: “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.”

It’s ironic that Greenspan featured so heavily in Powell’s address given that so much of the decision-making structure and forward guidance he inherited is the opposite of the way the system worked in Greenspan’s era. Back then the chairman pretty much was the Fed, and policy clues were conveyed through subtle smoke signals.

Many chafed that the show was a one-man band. These days the Fed, and central banks in many places, are all about transparency, forward guidance and projections. Democracy is all the rage at the Federal Open Market Committee.

But that wasn’t the theme of Friday’s speech. Long live the king!

To contact the editor responsible for this story: Philip Gray at philipgray@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss writes and edits articles on economics for Bloomberg Opinion. 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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