Wednesday, 16 Jan 2019

Trump bullied. Powell blinked.

About a week ago, after our bullyboy president maligned to a federal judge who had "Obama judge," Chief Justice John Roberts took the highly unusual step of issuing a public rebuke. Roberts reminded the president that the legitimacy of the courts of the courts is independent of party. It was a remarkable moment in the Trump presidency, a warning that there were limits to how much would be allowed in the world. The country cheered.

Now compares Roberts's defense of his institution to the response of Federal Reserve Chairman Jerome Powell this week after receiving a public rebuke from the president who appointed him.

"So far, I'm not a little bit happy with my selection of Jay," Trump told The Washington Post. Citing his ample "gut" as his authority, Trump opined that the Fed was "way off base" by raising interest rates as much as it has, causing it to fall.

A more confident Fed chairman would have politely told the president to buzz off, reminding him that the bank 's credibility with financial markets rests on its independence. Instead, Powell used a speech in New York to quote a couple of days ago. Wall Street traders took it as an invitation to begin piling back into stocks, sending the Dow Jones up 600 points.

I seriously doubt Powell actually succumbed to presidential pressure, or meant to announce a change in policy, but it was a way of looking at a lot of sophisticated people. And you can be sure that it's going to be such a president, who will be emboldened to take every opportunity to politicize the Fed, just as he has tried to politicize the judiciary.

It's not just Trump, however, whom Powell wound up emboldening.

Wall Street and corporate America love, love, love, and credit, which causes sales and corporate profits, real estate values, sales and corporate profits to be higher than they would otherwise be. So in every way they know how, these business interests push and cajole Washington as long as possible. They've been so successful for this past 20 years that the economy has become addicted to cheap credit. A painful withdrawal is inevitable, and the longer we wait, the more painful that withdrawal will be.

Powell, like his two predecessors, continues to wrestle with this challenge. At some point in their tenures, Ben Bernanke and Janet Yellen are in the process of being marketed, and rationalizing it by claiming the economy, or core inflation was not high. enough, or some structural change in the economy made it unnecessary.

By retreating, they are not only revealed, but also to the markets that the Fed would not be allowed to fall – what's a known among the traders as a "put." There was the Bernanke put and the Yellen could. And after this week, my fear is that there is now a Powell put, as well.

One reason Powell got himself into this predicament that he has embraced the idea that the Fed should be more transparent – after all, who's not for transparency? – and let everyone know what it is to do before. By avoiding surprises, or the theory goes, financial markets and the economy will be less volatile.

Why do you think you're going to do that? If you do not know what you're going to do, then you're going to be the same. even messier when unexpected shocks hit the Fed appears to change race, as happened this week.

Transparency has one other disadvantage. If financial markets think they know what the central bank will do, then market participants are likely to rely on their own assessments of future growth and inflation in their markets. The result is that the Fed loses an important source of information about the expectations of economic actors. At that point, what market rates and prices tell the Fed about the Fed is telling the market. What you get is an information feedback loop.

Former Fed Chairman Alan Greenspan took a different approach, believing it to be "mumbled with great incoherence," and to keep his options open and keep them guessing on Wall Street. For many years, that approached him and the economy well. The next time he goes to New York, Powell would do well to emulate it.


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