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Chairman Powell Delivers

Fed Chairman Jerome Powell delivered what will be viewed as the water-shed speech of his Fed Chairmanship at Jackson Hole. (1) There was no "happy talk" or obfuscation in his speech.

Chairman Powell put to rest the idea of the painless soft-landing he had been trying to sell for months to blunt the impact of Fed tightening which sent a mixed and confused message to markets on the Fed's priorities and intentions.

In this speech, he was clear and unequivocal about his inflation fighting priorities. Here are a few of his key comments:

"...the overarching focus right now is to bring inflation back down to our 2 percent goal."

"Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy."

"In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all."

"While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain."

"The labor market is particularly strong..."

"Restoring price stability will likely require maintaining a restrictive policy stance for some time."

"Our responsibility to deliver price stability is unconditional."

"...we must keep at it until the job is done."

The other truth which Powell failed to articulate is that monetary policy is only one side of a government's tool kit to fight inflation. The other side is fiscal policy. The reality is that current loose fiscal policy is at odds with the Fed's goal to tame inflation, irrespective of the merits of such spending.

Let's give Powell a pass on this at the moment. He does not control fiscal policy. It would have distracted from his main message. Expect him to comment on this tangentially in the future, as a Fed trying to fight high inflation by its lonesome will only mean that interest rates will have to be raised higher and longer than otherwise.

This is the speech Powell should have given long ago. Had he done so as some of us advocated, inflation would not be as high as it is now and the final trajectory of the current tightening cycle would ultimately be lower than it is going to be.

None-the-less, Powell the Inflation Fighter finally showed up.

Chairman Powell delivered what the market needed to be told.


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