Bloomberg Businessweek - USA (2020-10-12)

 ECONOMICS Bloomberg Businessweek October 12, 2020

31

THE BOTTOM LINE The Federal Reserve has pledged to

tolerate inflation above its 2% target. Less clear is how it can get

it to run that high.

ellon,aninvestmentaffiliateofBank
NewYorkMellonCorp.“Powellwants
ildthe Fed’sconstituencywiththe
Americanpublicandpoliticiansandtodosoby
backingawayfromtheimageofcentralbankersin
whitelabcoats.”
Powellwantedtomakemonetarypolicyless
reliantonunobservablecharacteristicsofthe
economysuchasr-starandu-star,andtofinally
deliveronthepromiseofdurable2%inflation.
Figuringouthowwasa keymotivationfor“Fed
Listens,”a 2019tourofthesystem’s 12 regions
inwhichFedofficialssoughtouttheopinionsof
economists, business owners, union members,
retirees, and others.
The approach policymakers settled on involves
more discretion than the Fed has exercised
since the Greenspan era. Powell and others are
refusing to say how long or how much they will
allow inflation to overshoot 2%. Consider this:
Inflation would have to average 3% from now until
April 2026 for the price level to reach where it
would have been if inflation had been 2% since

2012. It’s unlikely the Fed would let that happen
      because it doesn’t want shoppers to start thinking
      of 3% inflation as the new normal. On the other
      hand, just a month or two of, say, 2.1% inflation
      wouldn’t be much of a makeup.
      Vagueness about the strategy likely helped
      Powell and Vice Chair Richard Clarida, who was
      in charge of the policy rethink, achieve consensus
      between the hawks and the doves on the FOMC.
      It also gives the Fed some flexibility in case of the
      unexpected—a sharp drop in oil prices that lowers
      inflation or a widespread crop failure that raises it.
      But fuzzying up the objective guarantees that
      the Fed will be incessantly badgered to be more
      specific in the years ahead. And the lawyerly
      Powell doesn’t appear to enjoy sparring with ques-
      tioners the way Greenspan did. Asked at the FOMC
      press conference what the Fed means by “moder-
      ate,” Powell said, with perhaps a hint of frustra-
      tion, “It means not large. It means not very high
      above 2%. It means moderate. I think that’s a fairly

well-understoodword.”Hethenadded,“You

know,we’reresistingtheurgetotrytocreate

somesortofa ruleora formulahere.”

Formany,that’sunsatisfying.“Iwishit wasa lit-

tlemorespecific,”saysJohnTaylor,theeconomistat

StanfordandtheHooverInstitutionwhoseownrule

forsettingmonetarypolicyhasinformedtheFed

andothercentralbanks.Kydland,who’swatched

theFed’sconvolutionsfromSantaBarbara,says,“I

dohopetheyknowwhatthey’redoing.”Hesayshe’s

inclinedtogivePowellthebenefitofthedoubt:“He

seemstohavehisheadonright.”

ThedreamscenariofortheFedis thatitsmes-

saging works, the economy strengthens, workers

earn much-needed raises, consumers open their

wallets, and companies are able to raise prices

and get back to profitability. Easy monetary policy

lubricates the rise in prices. “I actually think they

have a much better shot with this new framework,”

says Jefferies’s Markowska.

There’s also a darker scenario that could pro-

duce rising prices. In that one, easy fiscal and mon-

etary policies are politically difficult to scale back

despite rising inflation caused by worker shortages,

trade barriers that cut off vital imports, and other

factors. In March, Charles Goodhart of the London

School of Economics and Manoj Pradhan of Talking

Heads Economics wrote in a column for the Center

for Economic Policy Research’s VoxEU site, “The

coronavirus pandemic, and the supply shock that

it has induced, will mark the dividing line between

the deflationary forces of the last 30 to 40 years, and

the resurgent inflation of the next two decades.”

Resurgent? Perhaps. At the moment,though,

Powell & Co. are thinking more abou

inflation than worrying it will get too high.

take some time,” Powell said at the Sept. 1

conference. “It’s a slow process, but there

process there.” Spoken like a thoroughlymod-

ern, prudently irresponsible central banker.

—Peter Coy, with Rich Miller

lif ng

“Itwill

press

a

ddd-

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ofN

tobui

American

“You know,

we’re resisting

the urge to try

to create some

sort of a rule or

a formula here”

Federal funds rate, target range Yield on 30-year Treasury bonds

1/2012 8/2020 Q4 1980 Q3 2020

3%

2

1

0

15%

10

5

0

DATA: BUREAU OF ECONOMIC ANALYSIS, BUREAU OF LABOR STATISTICS, FEDERAL RESERVE, BLOOMBERG*YEAR-OVER-YEAR CHANGE IN PRICE INDEX FOR PERSONAL CONSUMPTION EXPENDITURES.