Jerome Powell, the Federal Reserve chair of 2022 made an honest admission on December 14: “I would love to have a painless method for restoring price stability.” It’s not possible, so this is all we can manage.
The Fed began its aggressive cycle of rate hikes to combat the rising inflation with this statement.
Powell admitted that it would cost a lot of money and there were no easy fixes to achieve price stability.
After a year, the inflationary pressures seem to have eased without causing a wider economic decline.
For now, the feared stagflation, which is characterized by high prices and stagnant economic growth, has been avoided.
Many economists thought that it was almost impossible to control inflation without causing a recession just a year before.
Fed rate increases have stoked concerns of an economic downturn. Some predict layoffs, and others a decline in consumer demand.
Today however, the job market is still resilient, even if it has softened, the inflation rate is slowly aligning itself with the Fed’s target and the economic growth, although moderated, remains intact.
This outcome appears to be a major achievement by the Federal Reserve.
The question is: how much of Powell’s success can be attributed to his strategic ability and luck, respectively?
What role does policy play in Fed success?
Recent inflation figures are promising. Inflation has slowed to 2.5% in August from 2.9% in the previous month, thus moving towards the Fed’s target of 2%.
The core inflation rate, which excludes food and energy, has remained stable at 3.2%.
Powell’s aggressive strategy for addressing inflation included raising interest rates to their highest level in 23 years, 5.25%-5.5%.
The hikes were intended to cool a hot economy, by tightening the financial conditions and decreasing demand in sectors like housing and construction.
Powell supporters argue that Powell’s swift and decisive action played an important role in anchoring expectations of inflation, thus helping to ease price pressures.
Not everyone agrees. Several economists believe that disinflation was driven by factors outside the Fed’s influence.
The easing of disruptions on the supply side and an increase in labor supply due to immigration were both significant factors that contributed to the cooling down of inflation.
Powell’s policy may have played some role, but critics say that external factors were more important.
What is the power of timing in your life?
Powell has had a very fortunate tenure.
The mini-financial crises triggered by Silicon Valley Bank’s (SVB) collapse was one notable event.
Although it caused some market panic, the recession did not reach a full-blown level.
It gave the Fed an opportunity to slow down its rate increases, and gauge the response of the economy without resorting more aggressively to tightening.
The resilience of the economic system has also been an accident.
The household and business balance sheet was in a better state than expected, in part thanks to fiscal measures taken during the COVID-19 Pandemic.
The Fed rate increases caused less pain to the economy than originally thought.
The real neutral interest rate, the level where monetary policy does not stimulate or constrain the economy was higher than anticipated.
The Fed was able to demonstrate its resolve to combat inflation, without placing an excessive burden on the economy.
Factors such as unexpected gains in productivity and increased immigration, which were not anticipated played a part.
These factors, which are beyond the Fed’s control, have contributed to lower labor costs, and an improvement in the supply side, making a soft landing possible.
Fed still hasn’t reached 2% goal
The “last mile”, or the disinflation, is still a challenge.
There is still a risk of inflation resurging, similar to the 1970s cycle.
The housing costs are continuing to increase, while the job market is still tight.
Jerome Powell is to be credited for his efforts in preventing inflation from resurging as it did during previous cycles. However, there are still significant obstacles.
Fed must be careful to avoid rate cuts which could spark inflation. While the economy appears to be stable, rate cuts that are too aggressive could reverse much of what has been achieved.
What is more important, talent or chance?
Answer: It’s likely somewhere between.
Powell and the Federal Reserve played an important role in stabilizing the inflation rate, but they were unable to control many of these favorable conditions.
It is not just the Fed that was responsible for a soft landing. A series of lucky events including adjustments made after pandemics and changes in labor markets also played a role.
Powell’s leadership is not to be ignored; his strong actions against rising inflation have helped calm fears and anchor market expectations.
He may not have anticipated the fortunate breaks, but he took advantage of them.
Powell’s skills and the favorable conditions outside have contributed to the soft landing that has been achieved so far.
How carefully the Fed handles the next phase in monetary policy, and whether forces that have helped to temper inflation are still aligned will determine the future.
Powell may be able to claim some credit in navigating the complex landscape of an economic environment, but his journey towards full stability remains a long way off.
The post Jerome Powell: Did he achieve the impossible or is it luck? This post may change as the updates unfold
