Inflation has been rising for several months. But it was over 13 days into the fall that Jerome Powell, the chairman of the Federal Reserve, decided the central bank needed to get more serious about trying to stifle it.
The story of the latest Powell hub – the abrupt step towards tighter monetary policy announced Wednesday – shows a great deal about the decision-making approach of the man President Biden has nominated for another term as the country’s chief central banker.
In short: he can stick to his chosen political path in the face of public pressure, as long as evidence does not undermine his assumptions, but he is willing to change course quickly when data emerges that suggest the world is different .
The Fed’s policy committee announced on Wednesday that it would speed up the end of the central bank’s bond buying program and was likely to raise interest rates faster than had been anticipated as late as early November. The mantra of Fed officials over the summer months that inflation was likely to be temporary is now official history.
More than usual at a Federal Reserve news conference, Mr. Powell recounted the events that caused his political turning point.
Complaints about high inflation have risen sharply since the spring, but Mr Powell and the Fed held on to their view that it would slow down and that they needed to proceed cautiously with a pull back on stimulating policies. It began to change with a piece of economic data on October 29, which is closely followed by economists, but which gets relatively few headlines – an increase in the employment cost index.
The surprisingly high figure indicated that employers’ spending on wages and benefits rose faster in the summer months than economists had thought. It put Mr Powell on alert that inflationary pressures had the potential to be broader and longer-lasting than the Fed had expected.
What you need to know about inflation in the United States
That, he said, prompted him to consider adjusting plans for a Fed policy meeting five days later to wind up the central bank’s bond buying program faster than analysts expected. He and his colleagues in the Federal Open Market Committee stuck to the plan instead, but two more data points in the ensuing days made it clear that inflation risks were building.
Only on 5 November did a robust employment report show strong job creation and rapidly declining unemployment. Then, on November 10, the consumer price index showed a rise in inflation. That was enough for Mr. Powell. As colleagues began giving speeches and interviews in the days that followed, they made it clear that a more hawkish approach to monetary policy was on the way, as Mr Powell confirmed in congressional testimony last week.
“I think the data we got towards the end of the autumn was a really strong signal that inflation is more sustained and higher and that the risk of it staying higher for a longer period of time has grown, he said at the press conference. “And I think we’re responding to that now.”
The particular constellation of evidence that emerged from these three data points from October 29 to November 10 – since confirmed by other data releases – suggested that an inflation problem that once seemed to be primarily limited to cars, air travel and a handful of others products had become more broadly based.
And as employers pay more in wages and other costs to retain their workers, the possibility that they simply pass those costs on to customers in a self-reinforcing cycle of higher wages and higher prices has become more real. This so-called wage-price spiral was a feature of the persistently high inflation that lasted from the late 1960s to the early 1980s.
Central bankers are always faced with a tension between underreacting and overreacting to the latest economic headlines. On the one hand, if they react too quickly to incoming information, policies can become erratic, create unnecessary market volatility and fail to see through temporary forces hitting the economy.
But if they react slowly, it can create a risk of getting out of step with the realities of the economy. Historical examples include when the European Central Bank raised interest rates in 2008, even though what would become the global financial crisis began to drag down the European economy.
At worst, it can drive the economy to poor results out of some mixture of stubbornness, ego and a refusal to admit a mistake.
Sir. Powell’s strategy has been to make a forecast of how Fed leaders believe the economy is likely to develop, stick to its guns even in the face of outside pressure, but then be ready to change course abruptly if the evidence becomes convincing. that the forecast was incorrect.
It is also the pattern exhibited in a previous Powell pivot, in late 2018 and early 2019, though it was a shift in the opposite direction from this one.
The Powell Fed raised interest rates four times in 2018, earning withered public attacks from President Donald Trump. And at the December 2018 meeting, almost all of the officials gathered envisioned several further rate hikes during 2019 to stave off inflation.
In the days that followed, markets declined, and bond and other markets indicated that the Fed had made a mistake – that the economy was unable to withstand these rate hikes. Mr. Powell abruptly changed tone in January 2019, and by the middle of the year, he was lowering interest rates instead of raising them.
In the episode that now, Mr. Powell resisted the accusation that the Fed had made a mistake. “I would not look at the fact that we are behind the curve,” he said on Wednesday. “I would look at the fact that we are now able to take the steps we need to take in a thoughtful way to solve all the problems, including the one with high inflation. ”)
His first term as Fed chairman has, in effect, been the embodiment of a quote possibly apocryphally attributed to John Maynard Keynes: “When facts change, I change my mind. What do you do?”
While debating whether to confirm him for another term or not, senators will ultimately assess whether the Powell taps, especially this latest one, have been too fast, too slow or almost right.